Chapter 14

Taking Your Talents to the Small-Business Arena

IN THIS CHAPTER

check Making the most of your jobs and career

check Testing your entrepreneurial mettle

check Weighing your small-business investment options

Many people’s American Dream isn’t a 9-to-5 job working for someone else, especially a large company, for the duration of their career. A lot of these folks dream of starting and running their own business. Making plenty of money, being their own boss, and having flexibility in setting their hours are often part of the dream.

I’ve known plenty of dreamers over the years, as well as those who achieved their dream. This chapter is designed to help you to invest in yourself by making the most of your working years and figuring out how to pursue entrepreneurial endeavors, if that’s what you desire. I also discuss alternative ways to invest in small business that don’t involve starting a business from scratch.

Investing in Your Career

Some people aren’t going to enjoy — or be successful — as entrepreneurs. The simple truth and reality is that some folks are better off working for someone else. Plenty of people are happy or content as employees. There are many solid companies that need and want good employees, so you should be able to find a desirable job if you have skills, a good work ethic, and the ability to get along with others.

The global economy is increasingly competitive, and those whose skills don’t measure up will have a harder time finding the best jobs at the best wages. Well-paying, interesting jobs are out there, but applicants must have the right kind of background and training.

You can make the most of your income-earning ability and invest in your career in a variety of ways:

  • Get useful experience. You probably have in your mind at least a dream job (such as working for a particular company or organization). The reality, however, is you may not have the requisite training and experience to land the dream job right now. So you have to figure out what jobs will allow you to tap your talents and help you gain needed experience to realize your dream.
  • Read. One of the reasons you don’t need an advanced degree or even a fancy liberal-arts undergraduate college degree to succeed in business is that you can find out a lot on your own. You can gain insight by doing, but you can also gain expertise by reading. A good bookstore or well-stocked library has no entrance requirements, such as a high grade-point average or SAT score. A good book costs a heck of a lot less than taking college or graduate courses!

    remember You can read lots of “content” online. Just be sure you understand the quality and source of what you’re consuming. If something is “free,” investigate how the purveyor ultimately makes money and what its bias and agenda may be.

  • Continue your education. If you haven’t completed your college or graduate degree and the industry you’re in values those who have, consider investing the time and money to finish your education. Speak with others who have taken that path, and see what they have to say. Also, check out the increasing numbers of online courses being offered on sites like www.academicearth.org, www.coursera.org, www.edx.org, and www.udemy.com.
  • Work hard. Be willing to work extra hours and take on more responsibility. Those who take extra initiative and then deliver really stand out in a company where many people working on a salary have a time-clock, 9-to-5 mentality. Be careful, however, that the extra effort doesn’t contribute to workaholism, a dangerous addiction that causes folks to neglect important personal relationships and their own health. Don’t bite off more than you can chew; otherwise, your supervisors won’t have faith that they can count on you to deliver. Find ways to work smarter, not just longer, hours.

Deciding to Start Your Own Business

Should you start your own business? It’s often a difficult decision for most people, and it’s the first question you should answer before turning your business idea into the reality of your start-up company. In addition to helping you decide whether to start your own business, in this section I discuss a potentially attractive alternative: being an entrepreneur inside an established company.

Weighing your options

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.

Most people perceive starting their own business as the riskiest of all small-business investment options. But if you get into a business that uses your skills and expertise, the risk isn’t nearly as great as you may think.

tip Instead of leaving your job cold turkey and trying to build your business from scratch, you may be able to make progress by moonlighting. Many an entrepreneur has laid a nice foundation for his business over a couple of years by building up his business in this fashion.

You can start many businesses with little money by leveraging your existing skills and expertise. If you have the time to devote to building sweat equity, you can build a valuable company and job. As long as you check out the competition and offer a valued product or service at a reasonable cost, a principal risk with your business is that you won’t do a good job of marketing what you have to offer.

Sometimes entrepreneurial advocates imply that running your own business or starting your own not-for-profit organization 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. Starting and running a business aren’t for everyone, though. The good news: Other options may offer you the best of both worlds.

Entrepreneuring at a company

Wouldn’t it be great if you could have a job that gave you the challenge and upside of running your own business, with the security and support that come with a company environment? This combination does exist — if you can manage an entrepreneurial venture at a company.

If you’re able to secure an entrepreneurial position inside a larger company, in addition to gaining significant managerial and operational responsibility, you can 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.

For more small-business options beyond starting your own business or leading an entrepreneurial effort inside an established company, see “Considering Small-Business Investment Options” later in this chapter.

Turning a Business Idea into Reality

Ideas are a dime a dozen. I’d love to see you turn your best ideas into reality. To make that happen, you should develop a business plan, lay the groundwork financially and emotionally to leave your job, and determine how you’re going to finance your new venture. I cover these topics in this section.

Drawing up your business plan

If you’re motivated to start your own business, the next step is to prepare a business plan. Your business plan should be a working document or blueprint for the early days, months, and years of your business. It should enable you to plan your goals, apply for and obtain loans, and show potential investors what you plan to do with any money they would invest in or loan to your business.

tip 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 of 10 pages or less is fine if your goal is a “smaller” small business. However, if your goal is to grow, hire employees, and open multiple locations, your plan generally needs to be more substantial (30 to 50 pages) to address longer-term issues. If you want to solicit outside investors, a longer business plan is a necessity.

As you put together your business plan and evaluate your opportunities and challenges, keep your ears and eyes open. Expect to do research, and speak with other entrepreneurs and people in the industry. Most folks will spend time talking with you as long as they realize that you don’t want to directly compete with their businesses.

What follows are the highlights your business plan should cover:

  • The executive summary: An executive summary is a two- to three-page summary of your entire business plan that you can share with interested investors who don’t have the time and desire to wade through a lengthy plan. The executive summary whets the prospective investor’s appetite by touching on the highlights of your entire plan.
  • Business-concept definition: What do you want your business to do? What product or service do you want to offer? Your concept doesn’t need to be unique to survive in the business world. The existence of plenty of other businesses doing what you want to do validates the potential for your small-business ideas. I’m not suggesting that an innovative idea lacks merit. Indeed, a creative idea gives you the chance to hit it big, and being the first person to successfully develop a new idea can help you achieve big success.
  • Your objectives: Before starting your firm, think about your objectives, or what you’re seeking to achieve. Your objectives will likely evolve over time. Most for-profit businesses, not surprisingly, seek to maximize profits. Other common objectives can include working with people you like and respect, educating others, and improving an industry or setting a higher standard. You can’t accomplish these loftier objectives without profits, of course, and doing these things isn’t inconsistent with generating greater profits.
  • Understanding of the marketplace: The single most important area to understand is the marketplace in which your business competes. To be successful, your business must not only produce a good product or service but also reach customers and persuade them to buy your product at a price at which you can make a profit. So you must understand your desired customers and their needs. Discern what the competition has to offer, as well as its strengths and weaknesses. You also need to understand government regulations that affect the type of business that you’re considering.
  • Plans to deliver your service or product: How are you going to provide your product or service to your customers? If you want to manufacture a product, you definitely need to scope out the process 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 document what you do, and the better your employees can replicate your good work.
  • Plans to market your service or product: How much will you charge for your services and products? How will you position your products and services compared with the competition? Where will you sell your product or service? Finding and retaining customers is vital to any business owner who wants her 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. Software and websites (such as Constant Contact) give you fast, efficient ways to keep customer mailing lists up to date and print mailing labels if desired.
  • Plans to organize and staff your business: Many small businesses are one-person operations — so much the better for you if that’s what you desire, because you’ll have none of the headaches of hiring, payroll, and so on. But if you hope to grow your business and would rather manage the work being done instead of doing all of it yourself, you’ll eventually want to hire people. Give some thought now to the skills and functional areas of expertise that future hires will 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. Also consider what legal form of organization — sole proprietorship, partnership, S corporation, limited liability company, and so on — your business will adopt. This decision affects how the business is taxed and what its liabilities are in the event of a lawsuit, among other important issues.
  • Financial projections: An idea may become a business failure if you neglect to consider, or are unrealistic about, the financial side of the business you want to start. Financial projections are mandatory, and knowledgeable investors will scrutinize them if you seek outside money. 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. Preparing an estimated income statement that summarizes your expected revenue and expenses is a challenging and important part of your business plan.

    A balance sheet details a company’s assets and liabilities. A detailed balance sheet isn’t as important as tracking your available cash, which will likely be under pressure in the early years of a business because expenses can continue to exceed revenue for quite some time. A complete balance sheet is useful for a business that owns significant equipment, furniture, inventory, and so on.

After you research and evaluate the needs of your prospective business, at some point you need to decide whether to actually start your business. If you really want to, you can conduct and analyze market research and crunch numbers until the cows come home. Even if you’re a linear, logical, analytic, quantitative kind of person, you ultimately need to make a gut-level decision: Do you jump in the water and start swimming, or do you stay on the sidelines and remain a spectator? In my opinion, watching isn’t nearly as fun as doing. If you feel ready but have some trepidation, that’s normal.

Mind you, I’m not trying to present a rosy view of entrepreneurship. Plenty of small businesses fail, and plenty of small-business owners end up losing rather than making money.

Plotting to leave your job

You may never discover that you have the talent to run your own business, and perhaps have a good idea to boot, unless you prepare yourself financially and psychologically to leave your job. Financial and emotional issues cause many aspiring entrepreneurs to remain chained to their employers and cause those who do break free to soon return to their bondage.

On the financial side, plan for a reduction in the income that you bring home from work, at least in the early years of your business. Do all you can to reduce your expenses to a level that fits the entrepreneurial life that you want to lead.

In addition to reducing your spending before and during the period that you start your business, figure out how to manage the income side of your personal finances. One way to pursue your entrepreneurial dreams is to continue working part-time in a regular job while you work part-time at your own business. If you have a job that allows you to work part-time, seize the opportunity. Just be sure that the outside work you’re doing doesn’t conflict with your regular job.

Another option is to completely leave your job but line up work that provides a decent income for a portion of your weekly work hours. Consulting for your old employer is a time-tested first “entrepreneurial” option with low risk.

For many people, walking away from their employer’s benefits (including insurance, retirement funds, and paid time off) is both financially and emotionally challenging. Benefits are valuable, but you may be surprised by how efficiently you can replicate them in your own business:

  • Health insurance: The first option to explore is whether your existing coverage through your employer’s group plan can be converted to individual coverage (through COBRA). Also, get proposals for individual coverage from major health plans in your area. Take a high deductible, if available, to keep costs down. Having a high-deductible health plan, which is defined as an individual plan with a deductible of at least $1,350 or a family plan with a minimum $2,700 deductible for tax year (this amount increases over time with inflation), qualifies you to contribute money to a health savings account (HSA). Contributions to an HSA reduce your current year’s taxable income, and the money compounds without taxation over time. Withdrawals aren’t taxed so long as you use the money for qualified health-care expenses, which are broadly defined.
  • Long-term disability insurance: Your greatest asset probably is your ability to earn money. Long-term disability (LTD) insurance protects your work income in the event of a disability. Before you leave your job, secure an individual LTD policy. After you leave your job and are no longer earning steady income, you won’t qualify for a policy. Check with any professional associations that you belong to or could join to see whether they offer LTD plans. Association plans are sometimes less expensive because of the group’s purchasing power.
  • Life insurance: If you have dependents who count on your income, you need life insurance. You can generally purchase a life insurance policy on your own for less money than additional coverage through your employer would cost.
  • Retirement savings plans: If your employer offers retirement savings programs, such as a 401(k) plan or a pension plan, don’t despair about not having these in the future. One of the best benefits of self-employment is the availability of SEP-IRAs, which allow you to sock away up to 20 percent of your net income on a tax-deductible basis. With employees, the decision is a bit more complicated but often still a great idea.

Financing your business

While creating your business plan (discussed earlier in the chapter), you should estimate your business’s start-up and development costs. Luckily, you can start many worthwhile small businesses with little capital, but you will need capital — and for some businesses, significant amounts.

Here are proven, time-tested methods of financing your business:

  • Bootstrapping: Bootstrapping simply means that a business lives within its own means and without external support. This funding strategy generally forces a business to be more resourceful and less wasteful. Bootstrapping is also a great training mechanism for producing cost-effective products and services. It offers you the advantage of getting into business with little capital.

    Misconceptions abound about how much money a company needs to achieve its goals and sources of funding. The vast majority of small businesses obtain their initial capital from personal savings, relatives, and friends rather than from outside sources, such as banks and venture capital firms.

    Eventually, a successful, growing company may want outside financing to expand faster. Raising money from investors or lenders is much easier after you demonstrate that you know what you’re doing and that a market exists for your product or service.

  • Taking out business loans: If you’re starting a new business or have been in business for just a few years, borrowing, particularly from banks, may be difficult. Borrowing money is easier when you don’t really need to do so. No one knows this fact better than small-business owners. To borrow money from a bank, you generally need a business plan, three years of financial statements and tax returns for the business and its owner, and projections for the business. Seek out banks that are committed to and understand the small-business marketplace.

    tip The U.S. Small Business Administration (SBA) offers workshops and counseling services for small-business owners. Its SCORE (Service Corps of Retired Executives) consulting services (www.score.org; 800-634-0245) provide free advice and critiques of business plans, as well as advice on raising money for your business. For more information on the SBA’s services and how to contact a local office, call 800-827-5722, or visit its website at www.sba.gov.

    If you don’t have luck with banks or the SBA, credit unions can be a source of financial help. They’re often more willing to make personal loans to individuals.

  • Borrowing from relatives and friends: Because they know you and (ideally) like and trust you, your family members and friends may seem like good sources of investment money for your small business. They also likely have the added advantage of offering you better terms than a banker, wealthy investor, or a venture capitalist. Be sure to prepare and sign a letter of agreement that spells out the terms of the investment or loan and that states that you had a candid discussion with all involved as to the risks and downside if things don’t work out the way you hope.
  • Tapping investors for an equity investment: Beyond family members and friends, wealthy individuals are your next best source of capital if you want an equity investor. An angel investor is a wealthy individual who invests in small companies and has a track record of success in funding somewhat-similar businesses. Angels bring things to the table besides money, such as strategic advice and helpful business contacts.

    Finding folks who may be interested in investing requires persistence and creativity. Try consulting tax advisors and attorneys you know who may have contacts, and network with successful entrepreneurs in similar fields. Also consider customers or suppliers who like your business and believe in its potential.

Considering Small-Business Investment Options

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 or in the financial markets. In this section, I discuss the major ways you can invest in small business, including what’s attractive and not so attractive about each option.

Buying an existing business

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.

warning Although you don’t have to go through the riskier start-up 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 predate 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 to change 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.

Some people perceive that buying an existing business is safer than starting a new one, but buying someone else’s business can actually be riskier. You have to put out far more money up-front, in the form of a down payment, to buy a business. And if you don’t have the ability to run the business, and it does poorly, you may lose much more financially. Another risk is that the business may be for sale for a reason. Perhaps it’s not very profitable, it’s in decline, or it’s generally a pain in the posterior to operate.

Good businesses that are for sale don’t come cheaply. If the business is a success, the current owner has removed the start-up risk from the business, so the price of the business should include a premium to reflect this reduced risk. If you have the capital to buy an established business and the skills to run it, consider going this route.

Investing in someone else’s business

If you like the idea of profiting from successful small businesses but don’t want the day-to-day responsibility of 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 the following points describe you:

  • You have sufficient assets: You need enough assets so that what you invest in small, privately held companies is a small portion (20 percent or less) of your total financial assets.
  • You can afford to lose what you invest: Unlike with investing in a diversified stock fund, you may lose all of your investment when you invest in a small, privately held company.
  • You’re astute at evaluating financial statements and business strategies: Investing in a small, privately held company has much in common with investing in a publicly traded firm. A main difference is that private firms aren’t required to produce comprehensive, audited financial statements that adhere to certain accounting principles, the way public companies are. Thus, you have a greater risk of not receiving sufficient or accurate information when you evaluate a small, private firm. (There are also liquidity differences, in that with a small, private company, you may not be able to sell out when you want and at a fair current price.)

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 use your best judgment. That company or idea may be a terrific investment.

investigate Before investing, read and review the business plan. Thoroughly check out the people who are running the business. Talk to others who don’t have a stake in the investment; you can benefit from their comments and concerns. Remember, though, that many a wise person has rained on the parade of what turned out to be a terrific business idea.

Looking at franchises

Purchasing a good franchise can be your ticket into the world of small-business ownership. Franchising makes up a huge part of the business world. Companies that franchise — such as Papa John’s, Jiffy Lube, 7-Eleven stores, Gymboree, Century 21 Real Estate, Supercuts, Holiday Inn, Avis, Smoothie King, Subway, and Foot Locker — account for more than $1 trillion in sales annually.

When you purchase a franchise, you buy the local rights to a specified geographic territory to sell the company’s products or services under the company’s name and to use the company’s system of operation. In addition to an up-front franchisee fee, franchisers also typically charge an ongoing royalty.

Here are the primary advantages that come with a good franchise:

  • Proven business: A company that has been in business for several years and has successful franchisees proves the demand for the company’s products and services and shows that the company’s system for providing those products and services works. As a franchise owner, you benefit from and share in the experience that the parent company has gained over the years.
  • Name-brand recognition: Some consumers recognize the company name of a larger and successful franchise company and may be more inclined to purchase its products and services. The comfort that comes from dealing with such firms may stem from the influence of advertisements, recommendations of friends, or your own familiarity with their services in another part of the country. Most freestanding small businesses for sale in a community lack this name-brand recognition.
  • Centralized purchasing power: You would hope and expect that a corporation made up of hundreds of locations buys supplies at a low price. (Volume purchasing generally leads to bigger discounts.) In addition to possibly saving franchisees money on supplies, the parent company can take the hassle out of figuring out where and how to purchase supplies. Again, most unattached small businesses that you could buy won’t offer this advantage. However, quality business associations can provide some of these benefits.

remember When you purchase a new franchise, as with starting a business, you must find customers. However, the parent company should have a track record and multiple locations with customers. (You can also purchase existing franchises from owners who want to sell, and these businesses come complete with customers.)

Buying a franchise isn’t for everyone. Here are some common problems that may cause you to reconsider buying a franchise:

  • You’re not the franchise type. When you buy a franchise, you buy into an established system. If you’re the creative type who likes to experiment and change things, you may be an unhappy franchisee. Unlike starting your own business, where you can get into the game without investing lots of your time and money, buying a franchise that you end up not enjoying can make for an expensive learning experience.
  • You may be locked in to buying overpriced supplies. Centralized, bulk purchasing through the corporate headquarters supposedly saves franchisees time and money on supplies and other expenditures. Some franchisers, however, take advantage of franchisees through large markups on proprietary items that franchisees must buy from the franchisers.
  • The franchise is unproven. If the company’s concept hasn’t stood the test of time, don’t make yourself a guinea pig. Some franchisers show more interest in simply selling franchises to collect the up-front franchise money. Reputable franchisers want to help their franchisees succeed so they can collect an ongoing royalty from the franchisees’ sales. In the worst cases, franchisers engage in fraud and sell next to nothing, except the hopes of getting rich quick.

tip Do your due diligence before you agree to buy a franchise. You may be tempted to cut corners when reviewing a franchise from a long-established company. Don’t. You may not be right for the specific franchise, or perhaps the “successful” company has mostly been good at keeping problems under wraps.

Beware the pitfalls of multilevel marketing companies

Franchises and multilevel marketing companies have some similarities: Both offer a prepackaged and defined system for running a business. Although both types may be worth your exploration, significant obstacles can trip you up, especially with multilevel marketing companies (MLM).

MLM companies, sometimes known as network companies, can be thought of as a poor person’s franchise. I know dozens of people, from clients I’ve worked with to students I’ve taught in my courses, who have been sorely disappointed with the money and time they’ve spent on MLM companies.

In companies that use multilevel marketing, representatives who work as independent contractors recruit new representatives, known in the industry as your downline, as well as solicit customers. For those weary of traditional jobs, the appeal of multilevel marketing is obvious. You can work at home, part time if you want. You have no employees. You don’t need any experience. Yet you’re told you can still make big bucks ($10,000, $25,000, $50,000, or more per month).

warning A big problem to watch out for when dealing with MLM companies is the business equivalent of the pyramid scheme — businesses that exist to sign up other people. Beware of MLM companies that advocate the following: “Sell directly to those you have direct influence over. The system works great because you don’t need to resell month after month. It’s an opportunity for anybody; it’s up to that person how much work he wants to put into it.”

Think twice before you sign up relatives, friends, and co-workers. A danger in doing business with those people you have influence over is that you put your reputation and integrity on the line. You could be putting your friendships and family relations on the line as well.

remember The bottom line on any network marketing “opportunity” is to remember that it’s a job. No company is going to pay you a lot of money for little work. As with any other small-business venture, if you hope to earn a decent income, multilevel marketing opportunities require at least three to five years of low income to build up your business. Most people who pay to buy into networks make little money, and many quit and move on.

investigate Any MLM company examination should start with the company’s product or service. How does its product or service stack up to the competition on price and quality? Remember that due diligence requires digging for facts and talking to people who don’t have a bias or reason to sell to you. Contact the Better Business Bureau in the city where the MLM company is headquartered to see what kinds of complaints are on file. Be skeptical of multilevel marketing systems unless the company has a long track record and many people who are happy. In other words, assume that an MLM company isn’t worth pursuing until your extensive due diligence proves otherwise.

Quality multilevel marketing companies are the exception and make sense for people who really believe in and want to sell a particular product or service and don’t want to or can’t tie up a lot of money buying a franchise or other business. Just remember to check out the MLM company and realize that you won’t get rich in a hurry — or probably ever.

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
3.215.183.194