So you've decided not to work for "the man" anymore.
It may be the biggest decision of your life. When you toss aside the security blanket of a nine-to-five job in favor of owning your own business, you immediately become "the man" yourself. The difficult calls, formulation and implementation of strategy, indeed the full weight of the company rests squarely upon your shoulders. Along with those burdens comes the role that you may well resent in your current subordinate position: the boss. The only rear end you get to fantasize about kicking is your own.
Balancing out the risks are substantial tangible and intangible rewards. First and foremost, your hard work can generate profits that are yours, and not that guy who shows up for two hours a day and then heads to the bar — unless it is a bar. Secondly, there's the potential for a fair amount of personal freedom. Want to be home by four to watch the new episode of Sponge Bob Square Pants? If the business is to succeed, doing that very often isn't recommended, but the fact of the matter is that you could do that. Think "the man" would allow that? Not likely. Thirdly, you're in control of your own destiny. Well, maybe you, your spouse, the bank, the landlord, your attorney, your accountant, your suppliers and the IRS, but you're in there somewhere.
Start Ups
Starting up a business from scratch is generally the less expensive option in terms of initial capital outlay, since there is no good will to be acquired as part of the cost components. Depending upon the type of business, it could be as simple as setting up your organizational structure (usually either sole proprietorship, partnership, limited liability company, S Corporation,or C Corporation), obtaining a business license, figuring out your base of operations and marketing tools, and hitting the road, Jack. Consultants, for example, require relatively little in terms of overhead; they need business cards and a big mouth. Even if your business is one that requires inventory, fixtures, equipment and working capital held in reserve (always a good idea, regardless), the amount is usually controllable, as the size and scope of the start up venture is determined by the owner's capital and willingness to take risk.
Advantages of Start Ups
The major advantages of deciding upon a start-up company over purchasing an existing business are as follows:
- As mentioned above, it's usually the cheaper initial option
- Business name, organizational structure, location, target market and strategies are completely within your control
- Smaller scale initially, allowing time to learn the tricks of the trade
- Growth is generally slower and more manageable
- A "day job" can more easily be retained to help supplement personal (and sometimes business) cash flow
Advantages of Business Purchases
The primary advantages of purchasing an existing business are as follows:
- Ready-made customer/client base
- Less marketing required
- Likely good community reputation and support
- Possibility of positive cash flow from day one
- Generally bigger upside potential
Financing
If a small business loan is something you need to facilitate either option, be forewarned: neither option are simple to finance. Lenders consider business start-ups amongst the most risky of conventional financing requests, due to the simple fact that as many as 80% disappear within the first five years. Due to already having established market share and demonstrated cash flow, existing businesses carry a lesser failure rate; however, the risk is still very high.
One of the most popular and successful of conventional financing tools is the SBA's 7(a) loan program. Established in 1953, the Small Business Administration was created in order to provide long-term loans to small businesses at reasonable rates and fees. The 7(a) loan is the flagship program of the SBA, with a 2011 budget sufficient to support $17.5 billion in loan guarantees for term loans and lines of credit. Although many banks shy away from start-up businesses, many more will consider them under the SBA's 7(a) program.
Similarly, business acquisitions can be successfully financed through the SBA. In either instance, a down payment (or cash injection) will be required. For start-ups, the required percentage of the total project costs coming from the owner or owners is generally about 30%; for business purchases, it typically can be as low at 20%. Acquisitions are also frequently financed through a combination of cash, seller financing (where the seller carries a percentage of the total purchase price on a note over negotiated terms) and a bank/SBA loan. Utilizing the seller for a portion of the financing has the built-in advantages of favorable terms, potentially less cash down from the buyer, providing a more attractive financing structure in the bank's eyes, and keeping the seller interested and involved in the legacy and success of his business — hence, less time spent in the bar, frittering away the money you gave him.
Success Tips
As said above, the risks are great, but the rewards can be worth it. Keep in mind the following principles that can help make the start up or business acquisition a successful venture:
- Always be mindful of income, expenses and profit. A successful business is a profitable one. Being good at your trade isn't enough when you're operating a small business. If it loses money consistently, the business is unlikely to survive over the long term. In most industries, a good target after-tax net income percentage is 5-10% after paying yourself a wage.
- Manage your business closely. Remember the Field of Dreams line "If you build it, he will come"? Business owners often assume that once the doors open, business will flood in. Given the high failure rate, this is a potentially fatal mistake. Lenders consider management skills closely when deciding whether or not to offer a small business loan. Make sure you have the necessary skills, and if you don't, hire or contract with those who do as part of your management team.
- Be very careful about debt. Businesses that don't survive usually have excessive debt in relation to their net worth and cash flow. Utilize debt as a tool, a means to an end. Don't let debt overwhelm you. Even if you obtain a long-term loan such as the type offered through the SBA 7(a) program, make it your mission to pay it back as quickly as possible.
- Seek advice regularly, before things spin out of control. Talk to your accountant, business banker, attorney, family, trusted adviser, or even management consultants if necessary (be careful about that last option). Ego, or unwillingness to change things that aren't working, can be the downfall of your small business.
- Plan an exit strategy. Whether it be a positive one such as the sale of the business, or a negative one such as the wind-down of a venture that is not succeeding, the last thing you want is to have your personal financial statement negatively impacted. Don't bury your head in the sand with respect to the possible outcomes of your small business.
Summary
Small business ownership can be a highly rewarding experience if structured, financed and managed properly. The tangible and intangible benefits are many, as are the risks. Balance the risks with thoughtful, careful management of growth, cash flow and debt. Don't let "the man" get you down, especially since "the man" in this case is you. And unless your business is a bar, stay away from the bar. "The man" will thank you for it.
Sources:
- Moya K. Mason, Research on Small Business
- Marty Mannion, Grow Your Company Through Acquisition, Inc. Magazine
- SBA.gov
Walter McLaughlin - I am a 47-year old commercial banker living in the Seattle area. I am an avid sports fan, but also greatly enjoy writing satirical, ...
