Thinking of starting a business in Minnesota? Here's what you should know

Whether as a side business, or out of necessity, people in Minnesota are launching their own companies in record numbers.

The process can be daunting, so we talked to business owners and experts on key steps, from filing an application and getting necessary licenses or certifications to researching the market for your product or service and devising a business plan.

Keep in mind, lack of business knowledge, poor preparation and lack of capital are three of the main reasons businesses fail. Only 54.4% of businesses started in Minnesota in 2013 were still active in 2018, and 22.5% closed after the first year, according to the Bureau of Labor Statistics.

That's why the mechanics of business formation are important, said Kevin McKinnon, deputy commissioner of economic development at the Minnesota Department of Employment and Economic Development.

New business owners need to register with the Minnesota Secretary of State, obtain state and federal tax identification numbers, and if they are hiring people, register as an employer, he said.

There are other must-know items, McKinnon said, like figuring out the correct licenses and permits to operate in certain jurisdictions, and establishing banking and credit relationships and vendor and supplier contracts. For those who are already months, or years, into selling a product or service without the proper license or permit, it's better to correct that sooner than later for liability and tax purposes.

Many business owners need expert help to figure it out, and there are several organizations that offer mentoring and counseling services, free of charge.

For example, entrepreneurs need to decide what business structure is best: a partnership (two or more people who share responsibility), a limited liability company (structured to protect personal assets), sole proprietorship (single owner responsible for debts and obligations), or corporation (which can issue shares to founders and investors or eventually go public), McKinnon said. In Minnesota, registering a business can cost between $60 and $155.

Seeking legal counsel to help protect one's intellectual property is also important, he said. Legal fees vary, but some attorneys can charge as much as $400 per hour.

The list goes on and on, depending on what the business is, so we talked with a few entrepreneurs in the Twin Cities about their journey.

Realize it's not cheap starting a business. John and Jessica Waller started Humble Nut Butter, a line of nut butter spreads, using John's severance pay. Initial capital in 2018 was used to buy supplies and food processing machines. They also hired an attorney to help them set up an LLC, and later, a second attorney to help them with fund-raising from investors. While Jessica handles the day-to-day finances, they also hired an accountant to handle the business tax filings.

Most home-based businesses cost between $2,000 to $5,000 to start, according to the U.S. Small Business Administration, but expenses can rise by the tens of thousands depending on the need of that business, such as employees, equipment, renting or leasing office space, designing a website, and marketing costs.

When the Wallers contemplated expansion, they were surprised to learn how much more that would cost. To expand with a co-manufacturer and distribution partner, purchasing larger processing machines, shipping costs, renting space in a warehouse, paying grocers and brokers who can get products into grocers would cost thousands of dollars.

And in the early days, while money is leaving the account, not much is coming in. So as the company expands, it is important to establish a relationship with a bank or credit facility. It's also important to learn how to network to find investors or grant opportunities.

Know your market. In December 2021, friends Patrick Cronan and Bobby Guelich launched InVisory, a Minneapolis research and advisory technology firm that helps companies identify and buy the top apps that drive volume on the Salesforce AppExchange, along with identifying the best consulting firms to integrate those applications.

Years before launching, Cronan was in the early stages of designing a consulting solution for information technology leaders. His idea morphed into InVisory after he took a position at Salesforce. It was his 15 years of work experience that helped him identify the problems that InVisory is helping owners solve.

That knowledge of the market for a product or service is key, McKinnon said. You also need to think out what differentiates your company from other players in the market and how many competitors you have. That will help you figure out how much to charge. One of the biggest mistakes founders make is not understanding costs to serve a market, like supply chain, down to the end user, and the dynamics of what they can charge to stay competitive, McKinnon said.

"As a founder, you have an idea of what your product is worth," Cronan said. "But it's not until you take it [to market] do you see" the reality.

Leverage your networks. John Waller's background in sales made him a natural at networking, Jessica Waller said. Using a network of other entrepreneurs, the Wallers met distributors, gained knowledge on how to run their business and found customers. A friend of Jessica's designed the logo for their nut butter jars, and through connections, they met a a food scientist who helps with shelf life of their butters.

Cronan has a friend who is an intellectual property attorney who could help him learn how to protect InVisory's IP and discover if his product was infringing on any other proprietary software.

Have a viable product. Cronan and Guelich tested their proposition numerous times. Over the course of several months, they constantly made refinements to their proprietary software. "Every customer conversation and proof of concept talk helped us build a better product," Cronan said. "Feedback was crucial."

But make sure you leave room to refine the product even more.

"You have to get in front of customers to make it better," Cronan said. "People will do themselves a disservice by staying in the lab."

The Wallers spent nearly a year tasting and tweaking recipes before they started selling in local farmers markets. Since their launch, thousands of people have sampled their products, and the couple used that feedback to improve their butters.

You have to hustle. Customers don't fall from trees. After multiple phone calls to grocers went unanswered, John Waller began approaching managers inside stores. Waller did that for a year. His efforts paid off, as the company's products are now sold in Whole Foods Market and Kowalski's Markets in the Twin Cities, along with food cooperatives and selected stores in Illinois, Florida, Pennsylvania and Washington.