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Sunday, 04 January 2015 21:00

Persistence Pays Off: Business formation requires thorough planning, identifying role in the market

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Christy Malone started Ada-based SmartBottoms Inc. after completing a series of business planning exercises and identifying a market need for organic diapers, which the company produces at contract manufacturers in Michigan and Arkansas. SmartBottoms products are sold throughout the U.S., Canada and 11 other countries outside of North America. Christy Malone started Ada-based SmartBottoms Inc. after completing a series of business planning exercises and identifying a market need for organic diapers, which the company produces at contract manufacturers in Michigan and Arkansas. SmartBottoms products are sold throughout the U.S., Canada and 11 other countries outside of North America. PHOTO: KATY BATDORFF

Christy Malone’s business started from a need.

After learning that her second daughter was allergic to the finishing chemicals included in the fabric for cloth diapers that were made in China, Malone decided to use organic diapers. She found, however, there “were not a lot of options” other than buying the old-fashioned pre-folded diapers that were common generations ago.

“They didn’t exist. I couldn’t find anything,” Malone said.

So she decided to make her own diapers using organic materials and to sell them “to everybody and their brother because obviously, other people are going to want this, too.”

More than four years later, Malone’s Ada-based SmartBottoms Inc. produces organic diapers at contract facilities in Michigan and Arkansas that are sold at specialty retailers in the U.S., Canada and 11 countries outside of North America, plus online at several websites, all of which serve the “natural parenting” market. The company just started selling SmartBottoms organic diapers and accessories at kohls.com, the website for nationwide retailer Kohl’s, and is working on a deal with another big-box retailer.

But to get to this point, Malone had to start with the basic question: Would anyone buy what she was selling?

Over the course of a few months, she attended trade shows and events and talked to numerous people in the industry. She “explored all the possibilities” and asked questions about where the industry was going. She tried to find out as much as she could about the business — for example, how to source raw materials, her production options and the potential market opportunity.

“What we ended up discovering was that it was definitely a growing industry,” Malone said. “It’s something that really is a new industry over the last five or six years. What cloth diapers are (today) are nothing like what our grandparents used — nothing at all.”

After going through that process, Malone saw opportunity for a new company to enter an industry that in particular appeals to the growing “go green” movement and, at a time when the economy was in tough shape, could save parents some $2,000 to $2,500 over disposable diapers, Malone concluded.

While doing due diligence before starting a business seems basic and common sense, experts say the process that Malone went through is often lost on prospective entrepreneurs. Many times people are so focused on their particular idea for a product or service that they forego the much-needed market validation and planning that are necessary before starting the business.

The lack of thoroughly thinking through a business idea and assessing their own abilities are common errors among people going into business for themselves, said Dante Villarreal, regional director of the Michigan Small Business Development Center (MI-SBDC) in Grand Rapids.

Villarreal advises people who want to start a business to begin by first taking a hard look at themselves. They may have a specific trade or skill, or know a lot about a particular product because that’s been a lifetime hobby, but that doesn’t mean they possess the business skills required to run a business, he said.

“A lot of times, entrepreneurs will be very good at what they are doing, but not necessarily be able to translate that into a business model or have the business acumen to be successful,” Villarreal said. “They just want to focus on the product. They want to focus on the widget or the service they are doing, and they don’t want to spend time going through a cash-flow projection or a financial analysis or a marketing analysis. All they want to do is talk about that product because the passion’s there. But if you don’t spend time looking at the other pieces, the puzzle might not come together as nicely as you’d like.”

Many of the people who seek assistance at the SBDC are often initially concerned with how to legally structure a business. Villarreal tells them that incorporating, typically as an LLC (limited liability corporation), and issues such as securing a sales tax number from the state are easily handled by spending a few hundred dollars or so to hire a lawyer. He said he also tells them that those steps are the least of their worries.

“All that, candidly, is the easy part,” Villarreal said. “The hard part is going out there and making money. That’s where you need to focus.”

At the same time they assess themselves, prospective entrepreneurs need to figure out where their business fits in the marketplace before they proceed too far in the process.

Whether offering an innovation that can potentially disrupt a market or providing a common professional service, business owners need to identify what differentiates their business in the marketplace.

“Regardless of the type of business, you need to know and understand your business model to see what makes you competitive, and is that sustainable,” Villarreal said. “Are they bringing something to the table when it comes to the marketplace? What’s going to make them competitive? What do they do differently than the competitors that are out there? In a highly competitive environment, do you have something that puts you in the game? I’m not saying above anyone else, but at least in the game.”

The same goes for determining market demand and potential customers.

Until entrepreneurs fully understand who their customers in a new business are, “you really don’t know the value you bring to them and you really don’t know what your business is,” said Kevin McCurren, executive director of the Richard M. and Helen DeVos Center for Entrepreneurship & Innovation at Grand Valley State University.

Every business owner, whether forming a high-growth company or a lifestyle business, “starts the same” and needs to go through the same process at the onset. They also must avoid overestimating the market and should never assume they know what the market wants or needs, McCurren said.

“We have people who say, ‘I’m going to start this because I like it.’ Well, the question is: Who likes it and who’s going to pay you money for it?” he said. “Who is your customer? Where’s the true value that you relate to them? What problem are you solving? If you’re a plumber, is it really the plumbing or is it just knowing that you can trust someone in an emergency? If it is a restaurant, why do people come to you? Do they come to you for the experience, or do they come to you for the food or do they come to you for the cost?”

Business are predicated on providing the market three values: quality, speed or cost, McCurren said. A company can usually achieve two of those, he added.

“So you need to figure out where you fit in the value chain,” McCurren said.

A business plan that “to some degree” outlines target markets, cost and revenue projections, and a company’s vision and value will guide decisions in the formative stages of a company and as it matures, McCurren said.

Without that guide, business owners can stray and end up “following the next trend or path or shiny object, versus trying to say, ‘Here’s our customer, here’s our value and here’s how we’re going to execute on it.’

“It gives you that pathway you can always compare yourself to. You don’t have to stay with it, but it gives you a foundation that you’re always guiding yourself to,” McCurren said.

And once an entrepreneur assembles those projections and assumptions, “expect to be wrong” and be prepared to pivot if needed, he said.

“You’re going to be wrong at some point in time. You build that into your plan and then you adapt to it, so when you are wrong, it’s not a setback but a change in direction,” McCurren said.

Once entrepreneurs figure out where their business may fit into the market — and after they have done a self-examination of their own skills — they can determine how to structure a company.

For some, a partnership is a possibility. Partners can complement strengths and cover each other’s weaknesses.

If they choose that route, entrepreneurs need to work with an attorney to craft a partnership agreement that spells out the expectations and responsibilities of each partner, and an exit plan if the partnership falls apart or someone decides later to leave the business, McCurren said.

“If you have partners, you have to have an understanding of what happens to the business,” he said. “What does each one of you contribute and what happens if you wake up the next day and that’s not your partner? You need to define that early on so that it doesn’t destroy the business.”

A partnership agreement can give weight to the value that each partner brings to the business and should remain flexible, McCurren said. Businesses and individuals change over time, and partnership agreements need to change, too.

Early on, all a company and its partners have “is sweat equity and your ideas,” McCurren said.

“As the company develops, then you say, ‘Oh, boy. There’s something behind this,’” he said. “As the company grows, it changes, and the relationship changes. So not only do you have to define who has what, but then how do you change it when you go forth.”

Oftentimes, a business partner is a friend or a family member. Those partnerships can have their unique challenges and strain a friendship or a family relationship when difficult business decisions have to be made or when problems arise in the company.

Villarreal said people should not feel reluctant to go into business with friends or family. But they should craft an agreement up front that defines the role of each partner, and they need to make sure they “understand limitations and what each brings to the table,” he said.

“If you hold yourself accountable to that, it will go smooth. If you don’t and you’re not true to yourself and say, ‘I’m not the people person, I’m not going to go out and sell,’ and you don’t fulfill your obligations there, that’s where the problems start happening,” Villarreal said.

And they need to remember: Business is business.

“There is nothing wrong with going into business with friends or family if you have a partnership agreement and you treat it as a business, not as a family matter,” Villarreal said.

Read 4438 times Last modified on Sunday, 04 January 2015 21:37

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