Chapter 13
In This Chapter
Knowing what it takes to be a successful entrepreneur
Exploring alternatives to starting your own company
Looking at small-business investment options
Mapping out your small-business plans
Many people dream about running their own companies — and for good reason. If you start your own business, you can pursue something that you’re passionate about, and you have more control over how you do things. Plus, successful business owners can reap major economic bounties.
Business owners also face personal and emotional challenges, which rarely get airtime among all the glory of the rags-to-riches tales of multimillionaire entrepreneurs. Major health problems, divorces, fights and lawsuits among family members who are in business together, the loss of friends, and even suicides have been attributed to the passions of business owners who are consumed with winning or become overwhelmed by their failures. I’m not trying to scare you, but I do want you to be realistic about starting your own business.
In this chapter, I help you to assess whether starting a company fits with your goals and aptitude. I also present numerous alternatives that may better fit you and your situation.
The keys to success and enjoyment as an entrepreneur vary as much as the businesses do. But if you can answer yes to most of the following questions, you probably have the qualities and perspective needed to succeed as a small-business owner:
If you’re a people person, many businesses offer lots of contact. But you must recognize the difference between socializing for fun with co-workers versus the often more demanding and goal-oriented networking with business contacts and customers.
One of the worst reasons to start your own business is solely for the pursuit of great financial riches. Don’t get me wrong — if you’re good at what you do and you know how to market your services or products, you may make more money working for yourself. But for most people, money isn’t enough of a motivation, and many people make the same or less money on their own than they did working for a company.
To make your entrepreneurial dream a reality, you need to live within your means both before and after you start your business. But if running your own business really makes you happy, sacrificing expensive vacations, overpriced luxury cars, the latest designer clothing, and $4 lattes at the corner cafe shouldn’t be too painful.
When you run your own business, you may have customers and other people to please who are miserable to deal with. Fortunately, even the worst customers usually can’t make your life anywhere near as miserable as the worst bosses. (And if you have enough customers, you can simply decide not to do business with such misfits.)
Some people (especially parents) simply think that working for a giant company makes you safer and more secure (which, of course, is a myth, because corporations can lay you off in a snap). It’s also easier for them to say to their friends and neighbors that you’re a big manager at a well-known corporation (such as IBM, GE, Enron, Lehman Brothers, or WorldCom) than to explain that you’re working on some kooky business idea out of a spare bedroom. How secure do you think those former employees of Enron, Lehman Brothers, and WorldCom feel now about having lost their jobs at their former large company?
Partnering with or buying certain services or products rather than trying to do everything yourself may make sense for you. And over time, if your business grows and succeeds, you should be able to afford to hire more help. If you can be honest with yourself and surround and partner yourself with people whose skills and expertise complement yours, you can build a winning team!
Sometimes entrepreneurial advocates imply that running your own business or starting your own nonprofit is the greatest thing in the world and that all people would be happy owning their own businesses if they just set their minds to it.
A happy medium is available for people who want the challenge of running their own show without giving up the comforts and security that come with a company environment. For example, you can manage an entrepreneurial venture at a company. That’s what John Kilcullen, president and chief executive officer of IDG Books Worldwide (former publisher of this book), did when he helped launch the book publishing division of IDG in 1990. (IDG Books was subsequently bought by John Wiley & Sons, Inc.)
Kilcullen had publishing industry experience and wanted to take on the responsibility of growing a successful publishing company. But he also knew that being a player in the book publishing industry takes a lot of money and resources. Because he was a member of the founding team of the new IDG Books division, Kilcullen had the best of both worlds.
Kilcullen always had a passion to start his own business but found that most traditional publishers weren’t interested in giving autonomy and money to a division and letting it run with the ball. “I wanted the ability to build a business on my own instincts… . The appeal of IDG was that it was decentralized. IDG was willing to invest and provide the freedom to spend as we saw fit.”
If you’re able to secure an entrepreneurial position inside a larger company, in addition to significant managerial and operational responsibility, you can also negotiate your share of the financial success that you help create. The parent company’s senior management wants you to have the incentive that comes from sharing in the financial success of your endeavors. Bonuses, stock options, and the like are often tied to a division’s performance.
Some people are happy or content as employees. Companies need and want lots of good employees, so you should be able to find a job if you have skills, a solid work ethic, and the ability to get along with others.
Only your imagination limits the ways you can make money with small businesses. Choosing the option that best meets your needs isn’t unlike choosing other investments, such as in real estate (see Part III) or in the securities markets (see Part II). In the following sections, I discuss the major ways you can invest in small business, including what’s attractive and what isn’t for each option.
Of all your small-business options, starting your own business involves the greatest amount of work. Although you can perform this work on a part-time basis in the beginning, most people end up working in their business full time.
For most of my working years, I’ve run my own business, and overall, I really like it. In my experience counseling small-business owners, I’ve seen many people of varied backgrounds, interests, and skills achieve success and happiness running their own businesses.
Instead of leaving your job cold turkey and trying to build your business from scratch, you can start moonlighting as a tutor. Over a couple of years, if you can build the tutoring up to ten hours per week, you’re halfway to your goal. If you leave your job and focus all your energies on your tutoring business, getting to 20 hours per week of billable work shouldn’t be a problem. Still think starting a business is risky?
If you don’t have a specific idea for a business that you want to start but you have business management skills and an ability to improve existing businesses, consider buying an established business. Although you don’t have to go through the riskier startup period if you take this route, you’ll likely need more capital to buy a going enterprise.
You also need to be able to deal with potentially sticky personnel and management issues. The history of the organization and the way things work predates your ownership of the business. If you don’t like making hard decisions, firing people who don’t fit with your plans, and coercing people into changing the way they did things before you arrived on the scene, buying an existing business likely isn’t for you. Also realize that some of the good employees may be loyal to the old owner and his style of running the business, so they may split when you arrive.
Good businesses that are for sale don’t come cheaply. If the business is a success, the current owner has removed the startup risk from the business, so the price of the business should include a premium to reflect this lack of risk. If you have the capital to buy an established business and the skills to run it, consider going this route. Chapter 15 discusses how to buy a good business.
If you like the idea of profiting from successful small businesses but don’t want the day-to-day headaches of being responsible for managing the enterprise, you may want to invest in someone else’s small business. Although this route may seem easier, fewer people are actually cut out to be investors in other people’s businesses.
Consider investing in someone else’s business if you meet the following criteria:
Putting money into your own business (or someone else’s) can be a high-risk — but potentially high-return — investment. The best options are those that you understand well. If you hear about a great business idea or company from someone you know and trust, do your research and make your best judgment. That company or idea may be a terrific investment.
Here’s another problem with small businesses that seek investors: Many small-business owners take more risk and do less upfront planning and homework with other people’s money. In fact, many well-intentioned people fail at their businesses.
An MBA I know from a top business school — I’ll call him Jacob — convinced an investor to put up about $300,000 to purchase a small manufacturing company. Jacob put a small amount of his own money into the business and immediately blew about $100,000 on a fancy computer-scheduling and order-entry system. Jacob wasn’t interested much in sales (a job that the previous owner managed), so he also hired a sales manager. The sales manager he hired was a disaster — many of the front-line salespeople fled to competitors, taking key customers with them. He tried to cut costs, but doing so hurt the quality and timeliness of the company’s products. By the time Jacob came to his senses, it was too late. The business dissolved, and the investor lost everything.
If you’re motivated to start your own business, the next step is to figure out what you want to do and how you’re going to do it. In other words, you need a business plan. You need a general plan that helps you define what you think you want to do and the tasks that you need to perform to accomplish your goal. The business plan — which you use to plan your goals, obtain loans, and show potential investors — should be a working document or blueprint for the early days, months, and years of your business.
You don’t need a perfectly detailed plan that spells out all the minutiae. Making such an involved plan is a waste of your time because things change and evolve. The amount of detail that your plan needs depends on your goals and the specifics of your business. A simple, more short-term focused plan (10 pages or so) is fine if you don’t aspire to build an empire. However, if your goal is to grow, hire employees, and open multiple locations, your plan needs to be longer (20 to 50 pages) to cover longer-term issues. If you want to pick up outside investor money, a longer business plan is a necessity.
What do you want your business to do? What product or service do you want to offer? Maybe, for example, your business goal is to perform tax-preparation services for small-business owners. Or perhaps you want to start a consulting firm, open a restaurant that sells healthy fast-food, run a gardening service, or design and manufacture toys.
I’m not saying that innovative ideas lack merit. Indeed, a creative idea gives you the chance to hit a big home run, and being the first person to successfully develop a new idea can help you achieve big success.
Even if you aspire to build the next billion-dollar company, you can put a twist on older concepts. Suppose that you’re a veterinarian, but you don’t want a traditional office where people must bring their cats and dogs for treatment. You believe that because many people are starved for free time or have pets that despise a trip to the vet’s office, they want a vet who makes house calls. Thus, you open your Vet on Wheels business. You may also want to franchise the business and open locations around the country. However, you can also succeed by doing what thousands of other vets are now doing and have done over the years with a traditional office.
The reasons for starting and running your own small business are as varied as the entrepreneurs behind their companies. Before you start your firm, it’s useful to think about your objectives, or what you’re seeking to achieve. Your objectives need not be cast in concrete and will surely change over time. If you like, you can write a short and motivating mission statement.
Because he relinquished ownership of his company, Bogle gave up the opportunity to build a personal net worth that would easily be worth several billion dollars today. But Bogle wanted to build a mutual fund company that kept operating costs to a minimum and returned profits to the customers in the form of lower operating fees, which are deducted from a mutual fund’s returns. He’s also been outspoken about how owners of many mutual fund companies operate their funds too much out of self-interest instead of keeping their customers in mind.
Of course, you can’t accomplish these objectives without profits, and doing these things isn’t inconsistent with generating greater profits. But if your objectives are more than financial or your financial objectives aren’t your number-one concern, don’t worry — that’s usually a good sign. Remember the expression “Do what you love; the money will follow.”
If the market analysis is the most important part of the business plan, understanding your potential customers is the most important part of your market analysis. Understanding your desired customers and their needs is one key to having a successful business.
If you’re in a business that sells to consumers, consider your customers’ characteristics, including gender, age, income, geographic location, marital status, number of children, education, living situation (rent or own), and the reasons they want your product or service. In other words, find out who your prospective customers are. Find out where they live and what they care about. If you sell to businesses, you need to understand similar issues. For instance, what types of businesses may buy your product or services? Why?
Also try to get a sense of what customers do pay and will pay for the products or services that you offer. Analyzing the competition’s offerings helps, too. Some products or services require follow-up or additional servicing. Understand what customers need and what they’ll pay for your services.
If you want to raise money from investors, include some estimates as to the size of the market for your product or services. Of course, such numbers are ballpark estimates, but sizing the market for your product helps you estimate profitability, the share of the market needed to be profitable, and so on.
Always examine the products, services, benefits, and prices that competitors offer. Otherwise, you go on blind faith that what you offer stacks up well to the alternatives in the industry.
Most businesses are subject to some sort of regulation. If you want to start a retail business, for example, few communities permit you to run it out of your home. If you lease or purchase a private location, the zoning laws in that location may restrict you. Therefore, you need to check what you can and can’t sell at that location. Check with your city’s or town’s zoning department — don’t simply believe a real estate broker or property owner who says, “No problem!” That person’s goal, after all, is to sell the property.
If, for instance, you were going to start a veterinary practice, you would quickly discover that special zoning is required to use a piece of real estate for a vet’s office. Convincing a local zoning board to allow a new location to get such special zoning is quite difficult, if not impossible.
Many businesses face other local, state, and even federal regulatory issues, including ordinances, laws, and the need for specific licenses and filings. For example, if you were opening a restaurant, you’d have to heed ordinances and laws that regulate everything from signage to operating hours to your ability to serve alcohol. And you’d be subject to an amazing array of health codes, building codes, and fire codes, to name a few.
Every business has a product or service to sell. How are you going to provide this product or service to your customers? Suppose, for example, that you want to start a business that delivers groceries and runs errands for busy people or older and disabled people who can’t easily perform daily tasks for themselves. Delineate the steps that you’ll take to provide the service.
When potential customers call to inquire about your business, what kinds of information do you want to record about their situation? Contact software can assist with this task. Also, you can create a pricing sheet and other marketing literature (discussed in the next section) that you can send to curious potential customers.
If you want to manufacture a product, you definitely need to scope out the process that you’re going to use. Otherwise, you have no idea how much time the manufacturing process may take or what the process may cost.
As your business grows and you hire employees to provide services or create your products, the more you codify what you do and the better your employees can replicate your good work.
After you determine more in-depth information about delivering your company’s services or products, you need to decide on specific marketing information. Answer the following questions:
Having a great product or service isn’t enough if you keep it a secret; you gotta get the word out. You likely won’t have the budget or the desire to reach the same region as television and radio, so start marketing your product to people you know. Develop a punchy, informative one-page letter that announces your company’s inception and the products or services it offers, and then mail it to your contacts. Include an envelope with a reply form that allows recipients to provide the addresses of others who may be interested in what you have to offer. Send these folks a mailing as well, referencing who passed their names along to you.
Finding and retaining customers is vital to any business owner who wants his company to grow and be profitable. One simple, inexpensive way to stay in touch with customers you’ve dealt with or others who have made inquiries and expressed interest in your company’s offerings is via a mailing list. Once a quarter, once a year, or whatever makes sense for your business, send out a simple, professional-looking postcard or newsletter announcing new information about your business and the customer needs you can fulfill. Such mailings allow you to remind people that you’re still in business and that you provide a wonderful product or service. Computer software and websites (for example, Constant Contact) give you fast, efficient ways to keep customer mailing lists up-to-date and to print mailing labels.
Many small businesses are one-person operations. So much the better for you — you have none of the headaches of hiring, payroll, and so on. You only have to worry about you — and that may be a handful in itself!
But if you hope to grow your business and would rather manage the work being done instead of doing all of it yourself, you eventually want to hire people. (I explain the best way to fill your personnel needs in Chapter 14.) Give some thought now to the skills and functional areas of expertise that future hires need. If you want to raise money, the employment section of your business plan is essential to show your investors that you’re planning long-term.
Maybe you want an administrative assistant, researcher, marketing director, or sales representative. What about a training specialist, finance guru, or real estate manager if your company expands? Consider the background that you want in those you hire, and look at the types of people that similar companies select.
Before you launch your business, do enough research so you can come up with some decent financial estimates. Financial projections are mandatory, and knowledgeable investors will scrutinize them if you seek outside money. You also need to think through how and when investors can cash out.
Spending money to get your business from the idea stage to an operating enterprise is inevitable. Before the revenue begins to flow in, you incur expenditures as you develop and market your products and services. Therefore, you need to understand what you must spend money on and the approximate timing of the needed purchases.
If you were going to build a house, you’d develop a list of all the required costs. How much are the land, construction, carpeting, landscaping, and so on going to cost? You can try to develop all these cost estimates yourself, or you can speak with local builders and have them help you. Likewise, with your business, you can hire a business consultant who knows something about your type of business. However, I think you’re best served by doing the homework yourself — you discover a lot more, and it’s cheaper.
If you’re going to work in an office setting, whether at home or in outside space, you need furniture (such as a desk, chair, filing cabinets, and so on), a computer, printer, and other office supplies. Don’t forget to factor in the costs of any licenses or government registrations that you may need.
If you run a retailing operation, you also need to estimate your cost for establishing and maintaining an inventory of goods. Remember, selling your inventory takes time, especially when you first start up, and you need to have adequate stock on hand to fulfill reasonable customer orders in a timely fashion. And as a new business, suppliers won’t give you months on end to pay. Be realistic — otherwise, the money that you tie up in inventory can send you to financial ruin.
Preparing an estimated income statement that summarizes your expected revenue and expenses is a challenging and important part of your business plan. (I explain the elements of an income statement in Chapter 6.) Many estimates and assumptions go into it. As you prepare your estimated income statement, you may discover that making a decent profit is tougher than you thought. This section of your business plan helps you make pricing decisions.
Consider the Vet on Wheels business idea that I discuss in the “Identifying your business concept” section earlier in this chapter. What range of veterinary services can you provide if you make house calls? You can’t perform all the services that you can in a larger office setting, so decide which ones are feasible. What equipment do you need to perform the services? How much should you charge for the services? You need to estimate all these things to develop a worthwhile income statement. You should be able to answer these questions from the insights and information you pulled together regarding what customers want and what your competitors are offering.
Because building a customer base takes several years, try to prepare estimated income statements for the first three years. In the earlier years, you have more startup costs, so creating income statements more often ensures you have a good handle on this typically lean period. In later years, you reap more profits as your customer rolls expand. Doing income statements over several years is also essential if you’re seeking investor money.
An income statement measures the profitability of a business over a span of time, such as a year, but it tells you nothing of a business’s resources and obligations. That’s what a balance sheet does. Just as your personal balance sheet itemizes your personal assets (for example, investments) and liabilities (debts you owe), a business balance sheet details a company’s assets and liabilities.
If you operate a cash business — you provide a service and are paid for that service, and you don’t hold any inventory, for example — a balance sheet has limited use. An exception is if you’re trying to get a bank loan for your service business.
A complete balance sheet is useful for a business that owns significant equipment, furniture, inventory, and so on. The asset side of the balance sheet provides insight into the financial staying power of the company. For example, how much cash does your business have on hand to meet expected short-term bills? Conversely, the liability side of the ledger indicates the obligations, bills, and debts the company has coming due in the short and long term. See Chapter 6 for more information on all the elements of a balance sheet.
An executive summary is a 2- to 3-page summary of your entire business plan that you can share with interested investors who may not want to first wade through a 40- to 50-page plan. The executive summary whets the prospective investor’s appetite by touching on the highlights of your entire plan. Although this summary should go in the front of your plan document, I list this element last because you can’t write an intelligent summary of your plan until you flesh out the body of your business plan.