Special Thanks to Thom Beres, USAF, Col (ret)
You Want to Start A Business:
12 Things to Think About
The vast majority of people leaving the service still need to earn a living for many years before they can retire. Many want the security of a steady income and a set retirement date. For them a government job or a working for a company fits the bill. There are a few individuals that are willing to accept more risk to pursue a dream or have a more flexible work regime. These people often choose to start their own business. When I transitioned, friends and I looked at several business prospects before deciding to pursue our individual paths. I found that my best fit was to establish a consulting firm between working for major companies on projects that interested me. This required me to establish and dissolve my business between stints working for a company. Over the years I found there were a dozen or so consistent considerations I needed to address before establishing my business entity.
First get an honest appraisal of your strengths and weaknesses from others you respect. You may think you are easy to work with, but others may not see you that way. You may think you are great at conducting meetings and gaining consensus, but it may have only been your position at the time that got everyone to agree with you. Next reach out to the Small Business Administration (SBA) for information and arrange for an appointment with an SBA consular. The SBA can give you an honest appraisal of your plan and chances of success and pitfalls to avoid. Once you know your personal and business plans strengths and weaknesses you can see how they impact other considerations and figure out how to overcome them on your path to a successful business.
Next, are you a business person or an entrepreneur? My SBA counselor brought this up immediately. You see it often if you watch Shark Tank on TV. An entrepreneur loves creating something to sell not be tied to it forever. A business person wants to own something and grow it into an established company that will provide them a steady income. A business person has a hard time letting go of it even if it is failing. Entrepreneurs will see if it works and if not leave it and start something else. Many of your business decisions will differ depending on what type of person you are. The emphasis of where resources are applied are different for each type.
What kind of business? If it’s a franchise, you are for all intents operating someone else’s business plan not your own with all the franchise restrictions, but also with built in business expertise to help you. I ended up creating a personal consulting company which provided services. You may want to create a company providing products and services. My company was just myself and others on a contingent basis, but my earlier other ideas would have required me to hire other people and finance resources. Where you will spend “your” time and effort operating a business will vary greatly on whether you have employees or not.
The SBA told me most lawn and garden service companies (my first idea) are dissolved after the owner hires between 5-10 people. They closed not due to a lack of business, but because the owners were spending most of their time in an office, managing people or growing their business instead of being outside. Their passion was for yard work not office management. The counselor also said small business startups find it hard to pay people to do things like accounting and invoicing because they see it taking money out of their pocket rather than freeing them to do more high value things like customer relations and business development. So, my advice is to follow your passion so the 12-hour work days seven days a week seem enjoyable and pay someone else to do what you don’t like to do.
What kind of legal business entity will you operate under? A Limited Liability Company (LLC), an S corporation or a fully incorporated C corporation? All are established at the state level though federal laws impact how they operate. In Virginia an LLC can be done on line for a couple hundred dollars and the county license is less than a hundred dollars.
I am no lawyer but this is my laymen’s view of each business entity:
An LLC is quick and easy and shelters your personal assets from your company’s liabilities. This alleviates the spouse’s concern that someone could sue your company and take the house. If your company is sued only the company assets are at risk. All profits at the end of the year pass through to your personal gross income line (check the new 2018 tax changes to see how they are now handled). My businesses were always LLCs and I never kept more than $200 in the company account just in case someone sued because of what I recommended or wrote.
An S Corporation is called an S corporation based on the IRS chapter that covers it. Whereas an LLC works well when only one person owns the business an S Corp works well for a small business with more than one shareholder or partner., An S Corp is easier to establish and administer than a C Corp while still having many advantages of a bigger C Corp. Again, all profits fall through to the shareholders/partners as personal income and cannot be deferred to another year.
A C Corporation is what most of us are familiar with when a company has Inc after the name. Usually it is a large company with many shareholders, but doesn’t have to be. They can be expensive to establish and covered by many state and federal rules and regulations. A C Corp does allow the company to defer profits to future years, apply different tax rates and pay yourself a salary and dividends rather than requiring all profits to pass through to your personal income line each year. An LLC or a S Corp may grow and need to change to a C Corp, but they don’t have to despite their size. Most of the President’s businesses were formed as LLCs that dissolved if they went bankrupt. I simply dissolved my LLCs whenever I accepted an offer to work for another company.
Once you know the type of business entity you will operate, you have to decide where you will establish it. What state? Each has their own requirements and most require you operate in some manner in that state. This decision really impacts your cost of doing business. An example would be the difference of a consulting LLC established in Virginia vs California. California regulations and income tax are much more than in Virginia. Establishing your business in Virginia does not preclude you from doing business for a client in another state or even opening an office in another state.
Now you know the state you will establish your business, what will you use as your “place” of business? Your home, and office or a P.O. Box? You will need a local business license for wherever you get your business mail. As a consultant you will usually work at the client’s or a contract location and business meetings will either be done at the local Starbucks or client’s office.
Things to consider for a home office (my choice). Does your HOA or zoning allow it? Where will you meet clients? Do you need or want to declare a home office for property tax purposes? (This may complicate the sale of the home later if you depreciated the office square footage for taxes?)
A P.O. box doesn’t send a good signal to corporate customers, but may be acceptable if you are selling products over the internet.
An office or storefront is expensive, but may be necessary for success if working for small home-based businesses or selling a product.
Considerations for naming your company. The SBA pointed out how important it is for the name to say what you do somewhere in the title. “Neat Clips” may be a great name but it needs to say whether it is for dog grooming or haircuts. “Neat Clips Dog Grooming” would be better but “Neat Clips Pet Grooming” would be better because it does not limit the business to dogs, in case you wanted to expand into more than dog grooming. Mine was Cascades Strategic Defense Consultants (CSDC LLC). I stayed clear of using my personal name since it would have no meaning to many customers and lacked the ability to convey a larger size if my company grew. You also need to Google any name you consider and associated names such as CSDC to make sure it is not being used by anyone else or the initials do not reflect something undesirable. Once you have chosen a name you will also need to make sure you buy any domain names that reflect the name or misspellings of the name such as .net .com and .org etc. so customers always get you and not someone else if they mistype your address. My business used GoDaddy for all my internet requirements, but look at other providers that may fit you better. Once you have a good name you can fill out the paperwork and establish your business. What is next?
Got a clearance and want to keep it? This creates a problem for a lot of new businesses supporting Federal government contracts. Basically, you need to find another company that has a Facility Security Office (FSO) office that will hold your clearance for you. This means you have to be hired by that company in some manner and put against a contract even if not doing much work on the contract. Usually the FSO firm will hire you as a 1099 consultant for pay and security clearance purposes. This usually is for hourly work and for payment through an invoice you provide. Normally this will not preclude you from accepting other work from other companies. This symbiotic relationship works especially well if you seek out new contracts for the company that holds your clearance with an understanding they will hire you for some tasks if they win the bid. Basically, you are doing some free business development research for the firm in exchange for them holding your clearance.
Finances. Money in and money out. Be prepared for payment for your product or services to lag 30-90 days after sending an end of the month invoice. Can you handle this payment lag? Retainers buy a certain amount of your hours monthly before they are done. They can be nice and soften the payment lag of regular invoicing, but remember the client providing the retainer expects you to do their work before anyone else and to be available when needed. A retainer can limit your scheduling of additional clients.
Time management is a major consideration when starting a small business. Are you going to do your own bookkeeping using QuickBooks? How about personnel management? How much time are you going to spend on business development and staying in contact with past and future clients? All these take time you will NOT be paid for directly and take away from time doing billable tasks. The SBA rule of thumb is it will take two hours of your time for every hour of billable time. I found if I did all the items listed above it was more like three to one. Of course, you can outsource some of the tasks, but then that may seem like taking money out of your pocket. You really need to evaluate what your time is worth and where you should apply it.
So how much is your time worth? If a consultant how much do you charge and how do you bill for it? What do you expect the client to cover and what do you plan to cover as part of your rate? If you are selling a product, what factors do you include in computing the price? If selling a product what does your profit margin need to be in order to cover all costs and make it worth your effort?
The first lesson you learn is to charge what the market will allow NOT the lowest cost that you can provide it. This is called maximizing your profit margin. If everyone else has an hourly rate of $150 why charge $75 even if you would be happy getting $75? Once you set your rate all clients will expect that rate. Small businesses expect a lower rate than what a major can afford so you may need to decide what size client you want to focus on. Often you will be told what rate the client is willing to pay, especially if it is a large company or if it is in support of a government contract where the rate is in the contract. The client can pay you more than the government rate, but understand any additional money comes out of the client’s profit.
How you bill for your work may be dictated by the client, but normally it is done by a monthly invoice. Some want to be billed in six-minute increments and some in fifteen-minute increments. My minimum billable time was for 15 minutes for any phone call etc. I was always available 24/7, but they knew if they called me with a question they would be billed for the call. I logged all start and stop times on my Outlook calendar. For meetings in the area I required a half day minimum and out of the area was a full day minimum charge. I also billed for meeting preparation time and a client post meeting report. Basically, if you are doing things for a client it is billable. I did expect the client to reimburse me for travel and meal expenses but not for travel time per se. If I did client work on the plane I charged for that work effort but not the travel time. The monthly client invoice should include the date, duration and a short note on what the time was used for such as “meeting preparation”, “teleconference” or “preparing meeting report”.
At this point you have a company with a great name and you know what you are going to charge. Now how do you find a customer? If consulting there are several sources to find out what government contracts are coming up on FEDBIZOPS. Get an account and look for efforts that could use your talents then contact companies listed and offer to work as a 1099 consultant IF they win. Be careful not to lock yourself in with a single bidder prior to the contract award. Sell your talents not your sole! Get a LinkedIn account and look at job postings for the type of work you like to do and contact those companies for “information” interviews “in case” you want to apply for a position. Don’t hide that you are currently an independent consultant doing 1099 work. They may just put you on a list for future work. If selling a product find out who has competing products and where they are or are not sold and decide whether to challenge the competitors or beat them to a new area. If you hustle you will find you get lots of leads and more work than you can safely handle. For consultants, overbooking can become a problem and turning down work becomes an issue since the client may not return when you do have time.
That is my dirty dozen of things you need to consider before you start a business. In the end, I found many of the passions I wanted to pursue were best pursued as a volunteer and not by my owning a company to do them. I found that by starting a small consulting LLC I came across and accepted job offers by companies that had projects that I found interesting and rewarding. Once the project was done and I accomplished my goals I then found I did not want to just build a second career in the company so I would transition back to my LLC until the next interesting job offer came along. This allowed me to do everything from concept development for major defense contractors to government contract pursuits by both large and small companies to include managing the conduct of daily flight operations throughout Afghanistan.
Starting your own business is risky. Fifty percent of all restaurants don’t last a year. Transitioning from the service entails a lot of unknowns and risk. If you want security, get a job and work for someone else, don’t start a business. If you can stand the risk, want to be your own boss and have a passion for creating something new then starting a business may be the right thing for you. For me establishing a business was merely a tool not and end goal for finding the next challenging opportunity to apply my skills and learn new ones.
The author is a retired Air Force Special Operations Colonel who retired in 1999 and created an LLC twice and has worked for Lockheed Martin, a government agency, AAR Corporation and several large and small consulting companies. He currently is working for JRD and Associates when needed to support government contracts in the Washington DC area.