The past three years have seen a boom in new business start-ups. What should aspiring business owners know before jumping in on the trend?
There’s an impactful trend in American business that hasn’t made as many headlines as it probably should have: an explosion in the number of people starting a business. In 2019, roughly 3.5 million new businesses opened in the U.S., according to the U.S. Census Bureau.1 In 2022, roughly 5.5 million new businesses opened. That’s an increase of more than 50%.
Economists speculate that more accessible technology, more people preferring to work remotely, and possibly a surplus of free time during the pandemic all contributed to this surge. Add in the fact that digital-based businesses often require minimal physical space and can often be managed from almost anywhere in the world, and you have a combination that’s prompted many would-be entrepreneurs to take the plunge.
Starting a business as a high-net-worth entrepreneur
When a high-net-worth individual starts a new business, the path could be different than that taken by other business owners, says Eric Smith, business owner advisory strategist for Wells Fargo Wealth & Investment Management.
For example, business founders who come from wealth may need to consider unique issues such as:
- Whether to use existing funds or outside capital
- Whether they should start a new business or buy an existing business or franchise
- How to create a start-up advisory team, especially if family or business contacts have not launched an enterprise before
- Why they want to launch this business, and why now, if they’re already financially secure
Unless they come from a business or entrepreneurial family, those with high net worth who start businesses may not have a lot of “in the trenches” business experience. “Starting a family nonprofit or managing philanthropic efforts is quite different from starting a new business that needs to turn a profit,” says Smith. With that in mind, high-net-worth entrepreneurs might consider these four steps when it comes to creating a successful start-up.
1. Clarify your intentions. “Being in the right headspace when starting a business is as important as anything else,” suggests Smith. Be cautious about embarking on a start-up if you’re also undergoing another significant life event, such as the birth of a child or a divorce. Assume you’ll need to put significant time and energy into your start-up for several years.
Also, think carefully about money. “You personally might not need to rely on profits from your new company to finance your lifestyle, but your start-up still needs to make money — for the sake of partners, employees, and possibly venture capitalists who expect a return on their investments,” Smith says.
At the same time, pinpoint what you really want to gain from this business aside from profits. “Most successful people are driven by passion and by doing things they really enjoy, not just by money,” says Smith. “Use your start-up opportunity to do something you really love or feel strongly about. That passion will likely improve your start-up’s bottom line.”
2. Create a rock-solid business plan. This business plan should have the level of detail expected by outside investors and venture capitalists, even if you decide not to go that route for funding (see step 3). The plan can help guide your decisions and help make sure you’ve thought through the details that will be crucial for your success, including an overall strategy and marketing plan. Learn about writing a business plan online or get in touch with the U.S. Small Business Administration for more information.
3. Preview smart funding options. Entrepreneurs who come from wealth may have more financing options than other entrepreneurs. “However, just because you have ready cash or investments doesn’t mean you necessarily want to use them,” notes Smith. After all, you’ll forgo the future growth potential of those investments if you liquidate them to fund your business, and you can lose those funds if your venture does not succeed.
“If you already have a trusted banker or wealth advisor, talk with them about the pros and cons of using your own funds, borrowing from family, or working with outside investors,” Smith advises. The best choice for you will depend upon your specific situation and could be different from what you expect.
4. Assemble a top-notch advisory team. This could happen at any point in the process, as you’ll want to surround yourself with savvy business advisors well before starting a business. This can be more informal than a board of directors. If your new business has more than one founder/owner, you will want to have qualified legal counsel handle the formation, equity ownership, buy-sell agreement, and intellectual property rights at the beginning, when little or no value is at stake.
In the early stages of planning to launch a business, you may want to carefully consider whether it makes sense to involve family in your venture, suggests Smith. To round out your team, you’ll also want to consider a formal or informal advisory board. Reach out to business contacts that have some familiarity with the type of company you want to create or who do similar work but won’t consider you a direct competitor. “You really don’t know what you don’t know until you start talking to people in the business sphere you want to enter,” says Smith. The input from your team can help steer the direction of your business plan or your approach to funding, all with the goal of setting you on the path to success.
Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation.