How to Start Your Own Production Company Part II: The Nuts & Bolts

by Don Lawler

So you want to be the Ross Perot of radio production! While most producers would be better off concentrating on being specialists and working for someone else, there are some that have that burning desire to go into business for themselves. I remember telling my wife ten years ago that whether I made it in business or not, I just had to try. I couldn't face wondering 20 years from now if I could have done it. Whatever your reasons for starting a production company, I hope this series of articles will help.

Getting off to a good start requires a lot of planning and preparation. As owner, you are responsible for all aspects of business. If you don't have the knowledge needed, then you'll have to acquire it, or hire it.

Before doing anything else, you need to get your business plan on paper. Not only will potential investors require a written business plan, but it could save you lots of time, money, and heartache. Most of the businesses that fail will do so because there was no real plan. The owner probably had some idea of the grand scheme of things, but did not have a concrete plan with all of the small details written down. You should decide exactly what it is that you do better than anyone else and build your business plan around that.

The business plan is called a Proforma. It should include a description of your production company, your objectives, strategies, the current position and future outlook, information about the management team, the uniqueness of your service, market research, and any funds sought. You'll also need to show a complete financial statement with projections for the next 1 to 5 years.

Before opening your production company, you should have a clear understanding of all your local, state and federal tax obligations. You'll need to know what type of taxes are due, when you have to make payments, and what deductions you can claim. You can get free information from your library, the IRS, and your Secretary of State, but here is one place that you may be better off paying to have a CPA or tax attorney help you. Get recommendations from people you know about a good CPA or Tax Attorney that is familiar with radio, music, or video production. It doesn't hurt if they are well connected in political and social circles. Ask around for suggestions, just don't hire your "cousin Bubba!" This is your business, your baby, your paycheck! Look around, be tough, and hire the professionals you need.

Don't be surprised to see tax bills come from places that you didn't know even existed. You'll definitely have to pay the regular IRS, state, and local taxes. If you have employees, you may have several other taxes due, depending on the legal structure of your production company. By legal structure, I mean sole proprietor, partnership, C Corporation, or Sub chapter S Corporation. Each form of business has its advantages and disadvantages. On the subject of employee taxes, make sure you pay them on time! If the IRS is tough about one thing, this is it!

Unless you plan to be making a lot of money fast, hiring a number of employees, or taking on more liability than you can handle, you'll probably be better off starting out as a sole proprietor. You can start business quickly, inexpensively, and with less paperwork; plus, if you decide to close your company, you'll save a lot of time and money.

If you feel like your liability will be high, or you'll be making enough money to take advantage of the provisions in the tax code, then you may want to consider opening a corporation. Plan on talking with a CPA or attorney, and having from one to two thousand dollars available. It is possible to do it for less, but it depends on your state laws. Plus, you'll have to do a lot of the work yourself. Most of my companies have been Sub chapter S Corporations. But, if I had it to do over, I would probably start as a sole proprietor first, and then grow into the corporation.

To start a sole proprietorship, you simply go to your bank and open a business checking account. If you want to use a name different from your own, like "Airborne Radio," you would simply register your name followed by "dba," which stands for "doing business as," followed by your company name. Your local government will probably also require that you register with your city or county and purchase a business license. Setting up as a sole proprietor is usually simple and inexpensive. Closing your business is just as simple. Another important expense to budget for is insurance. If you have equipment or own your office, you'll want to be able to replace it if disaster strikes. Insurance should also protect you from losses due to being sued. These days production companies are very vulnerable to litigation. Someone may charge you with copyright infringement, liable, slander, negligence, or any number of other things that could put a financial drain your business and personal funds.

I have found that the cost of insurance can vary greatly for the same coverage. Again, you are the consumer. You are totally responsible. Be tough, shop around, and scrutinize every bit of information. Don't let someone sell you something you don't need, but be wise and make sure that you'll be protected.

One of the major considerations in opening any business is location. Many production companies simply operate out of the owner's home to save money, but you should consider carefully what your customers will want. Also, local laws may prohibit you from doing business from your home. If you decide that your customers will need to see you in commercial office space, try to look for a place that is convenient for your customers. The location, space, and amenities should fit with your overall image. Make sure that your neighbors also are keeping with the image you're trying to project.

Try to negotiate a good rental price with no more than a one year lease. Too, many people sign five year leases with their houses attached as collateral. If business goes sour, you could lose years of savings or worse. You have every right to scratch out clauses and include your own conditions. Remember, a lease is just as much for your protection as it is for the landlord's. You'll be spending a lot of time there, so make sure you get what you want. It can be tough to find a landlord that will take a chance on a new business with no track record, especially if you are going to open a recording studio as a part of your production company. Start looking and talking with landlords several months before you need the space. I had a very bad experience with my first landlord. The building had a horrible air conditioning hum that he never fixed. In fact, I could never find him to fix anything! When it came time to renew my lease, I found a good broker and moved. I told her exactly what I wanted and what I didn't want in an office. She found several locations that fit my criteria and even handled the negotiations. While this turned out to be a good experience for me, it may not be best for you. Research your market, and talk with some local business people first.

Money is the grease that keeps business running. When it's gone, things come to a screeching halt. Try to have the capital you need to sustain the business until it is profitable. I have a friend that was basically forced into business when he lost his radio job. Fortunately, he had a good idea, was a good salesman, and landed some good paying accounts quickly. His father was also able to loan him money for equipment. Unfortunately, most businesses do not get off to a good start when there is not enough money available for those lean months.

A good source of funding is also needed for expansion. Every time you make a sale, you'll incur expenses. If your sales are good, your production company will start to grow. You'll need to hire more staff, buy more materials, and pay more people for freelance services like copy writing and voice talent. If you have extended too much credit, you'll need to have money to operate while you wait to collect. When my business began to grow, I found that my expenses and taxes grew, also. Since I had extended credit to slow paying clients, I had to continually borrow money to operate. It is important to start early seeking sources of capital. As your production company grows, you'll find it even more important to find ways to finance your operation.

One thing that will help you keep score in your business is a good bookkeeping system. I would advise getting a CPA to at least help you design a system for your business, but there are plenty of good computer software packages that will allow you to do most of the bookkeeping yourself. I use Quicken, but know that Pacioli, Peachtree, and Dome System are also very good packages. These systems all have pretty good basic explanations of the accounting process. You might also want to enroll in a continuing education class or two at your local college. I guess I tend to be a little obsessive compulsive, so I went back to school and majored in accounting. Two years later, I would suggest that you simply find a good book at your library or local bookstore.

The purpose of a good control system is to minimize waste, fraud, inefficiency and poor planning. You'll need to know what your cash flow situation is, if you have enough tape & supplies on hand, whether your expenses are more or less than you budgeted for, if your sales projections are where they should be, and if any accounts are becoming a problem. At the very least, you should be able to read and understand a P&L (profit and loss statement) and a balance sheet.

A good accounting system will help you monitor who owes you and for how long. Believe me, it's no fun to work hard helping other people make money, and then not get paid. It's happened to me and it will probably happen to you. But there are some things that you can do to protect yourself. First of all, you are in business to make a profit, so act like it. People will respect you if you treat your enterprise seriously and not like a hobby. If possible, get clients to give you a purchase order number, a down payment, or payment in full. Unfortunately, when I opened business, most of the ad agencies in town had been used to walking into a studio, cutting their spots, and walking out. This "tradition" has made it hard to get smaller agencies to sign anything, and I feel like that is why so many local agencies pay slowly. Hungry studio owners are often like lambs waiting to be slaughtered by quick talking, pushy agency people. You know the type that promises tons of future work...IF you can lower your price on THIS job, assume all the financial risk, AND have it ready in an hour!

Now don't get me wrong, some of my best friends are agency people, and most of the agency people I know are ok, but we all know that there are plenty of wolves out there, too. Just remember, it's the little pig with the brick house that lived happily ever after.

A recent issue of USA Today reported that strong companies are getting stronger and weak companies are getting weaker. Going into business for yourself is a very risky business. The competition, government regulations, taxes, and lack of money make it almost impossible to survive, let alone thrive. The current economy has made it even more important to be properly prepared. Before opening your production company, I would strongly suggest that you take 6 months to a year to do your research and planning, get your personal finances in order, seek sources of business capital, find a good location, and develop a client base. Many authorities advise saving enough money to live and run your company for 6 months to a year with no thought of making a profit. Many businesses operate for 2 or 3 years before realizing a profit.

There are a number of great books on the subject of starting a business; plus, groups like the Small Business Administration, SCORE, your local library, college, and even the IRS can provide you with plenty of reading materials, classes, and counseling. Much of this information is free. I have even taken short trips to other markets to talk with owners of other production companies. I have learned from them and they have hopefully learned from me.

Next month, we'll look at some of the "fun stuff" like deciding on the services you want to sell and how to market them.

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