CHAPTER 2
make smart choices
consider your options

NOW THAT YOU have an overview of what it takes to start and grow a successful small business, you may be having second thoughts. Good. You are thinking carefully about making this major decision. Now is a good time to introduce a few options that can help you minimize your risk if you choose to get into business for yourself.

Don’t Go Cold Turkey: Begin Part-Time

Consider testing the waters by starting your business on a part-time basis. If you currently have a full-time position, you may be able to begin by working on your business during your own time; for most people, that’s evenings and weekends. But there are a few key things to be mindful of if you decide to moonlight with your own business.

First, don’t do the kind of work that would conflict or compete with your current employer unless you have fully disclosed it and obtained your boss’s permission; otherwise, it could be grounds for immediate termination. On the other hand, there are examples of employers who have helped employees build their own businesses. This may be your case if there are projects too small for your current employer and they are something your new business could handle on the side. Your employer might refer those opportunities to you, giving you an opportunity to build experience and a clientele.

Second, don’t let your part-time business interfere with the work you are doing for your current employer. Remember, whenever you are “at work” you are obligated to focus on only those tasks that benefit your employer. Stealing a little time from your employer to work on your own part-time business is just that—stealing. That, too, can be grounds for termination.

Keep in mind that while this venture may be a part-time business for you, your customers or clients are going to expect your full attention and professional results. So don’t set expectations that you can’t deliver, or take on more than you can handle. That’s an easy way to get a bad reputation for your business, which can be difficult to overcome and a serious problem if you decide to make your business a full-time venture.

Manage your part-time business just like a “real” business—because it is. Set up a bookkeeping system so you can keep your business income and expenses separate from your personal records. Make sure you have the appropriate permits and licenses. Create professional-looking marketing materials and a website.

You may find, as many people do, that your part-time business will grow and flourish and bring you to a decision point: whether to stay with your current employer, keeping your business small enough to manage, or take the big step and quit your job to focus on the growth of your business. At this point, at least you’ll know whether or not you enjoy the challenge of running a business on your own, which should guide you in making the right choice.

A Part-Time Success Story

Twin brothers Randy and Jeff Vines grew up in the suburbs of St. Louis, but at a very young age they fell in love with the history, culture, diversity, and even the quirkiness of the city of St. Louis. On Saturdays, while most teenage suburbanites were hanging around the shopping malls, the Vines brothers would hop on a city bus and spend the day producing a local-access television show on city life.

“The people in the city are just a notch above. They have swagger you just don’t see everywhere,” explains Randy Vines.

While away at college, the brothers wanted to display their civic pride and show off the unique character of their beloved city via their clothing. But the only apparel available was typical tourist attire—not exactly what they had in mind. Then, back in St. Louis with traditional jobs, the Vines brothers still longed for edgy, trendy apparel depicting the colorfulness of St. Louis, so they decided to create their own. Almost immediately, they knew they were onto something big.

“When we would wear our own designs, we’d be asked by strangers on the street, ‘Where did you get that shirt?’” remembers Jeff Vines. “So we did a small run and then signed up to have a booth at some downtown festivals, and we always would sell out quickly. We learned real quick what people wanted.”

That was the beginning of STL-Style. Mostly selling out of boxes in the back of their car, the Vines’s T-shirt creations became a big hit, garnering extensive press coverage, including an article in the New York Times. Soon people were ordering from around the world, and it was difficult to keep up with demand. While continuing to work their “day jobs,” the two committed their nights and weekends to their burgeoning business.

“There weren’t enough hours in the day. We had to hire our friends to help out part-time, and it became a matter of whether we were going to keep treading water and doing what we were doing or were we going to take this to the next level and get serious about it,” Jeff says.

After nine years of part-time operations, testing the market, and developing new products, the Vines twins decided to turn their part-time passion into a full-time enterprise. As Randy notes, “I think more and more, the culture in America is about taking less conventional approaches to earning a living. More than ever, there is this excitement about entrepreneurism and people are figuring out a way to turn their passion into dollar signs.”

A part-time business gives you the opportunity to develop your business model and learn from your mistakes. Randy and Jeff Vines waited until the business basically directed their decision for them. It had gone as far as it could go as a part-time endeavor. That’s a pivotal point many part-time businesses reach, and if you decide then to pursue the business full-time, you aren’t starting from ground zero. You already have history and experience from which to grow, and that minimizes your risk.

A Franchise May Be a Start-Up Shortcut

Starting a business from scratch is difficult. You have to figure out everything on your own, and in the process you inevitably make mistakes—some of them costly, some of them just frustrating. Let’s hope none result in the loss of your business, but there is always a level of inherent risk involved.

Buying a franchise minimizes the risk of getting started in business. A franchise operation is, in many respects, a business in a box. It comes with a set of instructions, so to speak, including customized training and ongoing support. Whether it’s with accounting and financing, advertising and public relations, personnel management, purchasing, or inventory control, the franchise organization is there to assist you and help you succeed. As a franchisee, you are in business for yourself, but not by yourself. In return for this assistance, you typically pay an initial fee and ongoing royalties to the franchise organization.

While there are many excellent franchise opportunities available today, don’t be lulled into a false sense of security. Just as with any other business opportunity, you need to do your homework; you need to make sure the franchise is a good personal choice, as well as a smart financial decision.

If you like doing things your own way, however, then a franchise won’t be a good fit for you. To protect its brand and maintain consistency, the franchise organization expects its franchisees to do business their way. So if you don’t follow their system, depending on the terms of your contract, you run the risk of losing your franchise. For some people, the thought of giving up even a little control is out of the question. So if you have a strong entrepreneurial spirit, then becoming a franchisee probably isn’t your best bet.

However, if you do choose this approach, make sure you invest in a solid franchise operation. If you are seriously considering the purchase of a franchise, review the document called the Uniform Franchise Offering Circular (UFOC). The Federal Trade Commission (FTC) requires any franchise organization to provide you with this document; this is known as the “Franchise Rule.” In the document, you’ll find detailed information about the franchising company, including financial statements, past or pending litigation, bankruptcies, and a list of existing franchises. Ask the franchise organization lots of questions. Secure professional help to review the document as well. And by all means, talk to existing franchisees.

In addition to doing the normal due diligence, make sure the franchise you are considering is a good fit for your particular area. Not every franchise opportunity works in every geographic area. For example, have you ever visited a different part of the country and stumbled on a particular franchised restaurant that you enjoyed, and thought how you’d love to have one where you live? Maybe you think the restaurant would flourish in your area—but there may be a very good reason there aren’t any in your community. Considerations such as population density, ethnic characteristics, the socioeconomic makeup of an area, and even the climate may all be important factors in determining whether or not a franchise will be successful in a particular region.

In addition to location, long-term appeal of the franchise product or service is important. Is the business based on a fad? Fads are fleeting, and you don’t want your investment to fizzle out because the product or service has lost its popularity.

Find out, also, what is expected of you other than your financial commitment. For example, what type of experience is required? Some franchises don’t expect you to have any experience in the industry, but they may require that you spend considerable time in training to learn their system. For example, McDonald’s and its famous Hamburger University.

You’ll also need to know what kind of work hours and personal commitment will be expected of you in order to run the franchise successfully. One franchise organization I consulted with a number of years ago required that their franchisees be owner/operators. In other words, the buyer of the franchise needed to be at the location most of the time. That may not be a good fit for your lifestyle.

Finally, if you choose to invest in a franchise system, know your rights. Consult with an attorney before you close the deal to make sure you are protected.

Buy an Existing Business

Many would-be business owners prefer the idea of purchasing an already existing business. Certainly, buying a business is significantly less risky than starting one from scratch. But just as if you were starting with an original business concept, the first question you must ask yourself is: Is this a business I’d feel good about and enjoy? Do I have adequate experience in this type of business or industry to be successful? If the answer is “no,” then, it doesn’t matter if the business is a sure thing—it’s not the right fit for you.

There are several ways to identify a potential business opportunity for sale. One way is through a business broker, who works much like a real estate agent, except he or she specializes in listing and selling businesses instead of properties. However, not all business brokers are created equal. Research the brokerage company before you pursue any listing. Make sure the company and the representative are legitimate. Also, keep in mind that, just as in real estate, the broker is representing the seller, not your interests. If you get serious about pursuing a business opportunity, you need to obtain independent counsel to protect your interests.

You can also learn about businesses for sale from other business owners or from professional advisers. A lot of businesses don’t want to broadcast the fact that they are for sale, for fear of losing their customers and their employees; therefore, the potential sale is handled more discreetly. For example, the business owner may confide in his CPA that he is interested in selling. The CPA, who works with a lot of other clients, may be aware of someone who is searching for a business in which to invest. The CPA may also confidentially mention it to other professionals with whom she works.

Another option is to do a little legwork on your own if you know the type of business you are interested in. Have you ever driven through a neighborhood when you were in the market for a house and found one you fell in love with, even though it wasn’t for sale? Maybe you watched and waited for a while to see if it would become available, or perhaps you were bold enough to knock on the door and share your interest with the owner. You never know unless you ask. So apply the same technique to your business search. Drive through the business neighborhood, so to speak, and identify businesses of interest. Then ask around, because you just never know. In fact, sometimes you may find a business owned by someone who is reaching retirement age and who has no succession plan in place. In that case, you may be able to purchase the business and work out an agreement whereby the retiring owner remains active for a period of time. That gives you the advantage of learning from the previous owner and allowing for a smooth transition with employees and customers.

Buying a business can certainly ease your entry into the world of entrepreneurship, but you still have to be smart about it. Even if a business seems to be financially sound, if you don’t know anything about the business you could have problems, because usually there won’t be anyone around to train you. Take note of the nature of the business. If it is a business built on personal relationships, it may be difficult to sustain those relationships once the original owner is gone.

Before you make a buying decision, do your homework. Dig into the financials and ask questions. You especially want to know why the owner is selling. That may be the most important question you ask. Perhaps there is something going on that isn’t apparent in the business records. For example, I once heard about a business for sale that, by all indications, looked like an excellent deal. But when the prospective buyer did additional research, talking to some other business owners in the area, he learned that a bridge that served as the primary way in and out of the region was going to be closed for repairs for about a year. Imagine what a serious impact that would have on the business.

Remember that buying an existing business can be expensive. Generally, the rule of thumb is that for every $100,000 of personal income you want to take out of the business, you’ll pay five times that amount for the business. In today’s economy, banks are seldom willing to make loans for the purchase of an existing business, so you might need to seek seller financing. You should consider it a positive sign if a seller is willing to finance the sale with a minimum down payment. It demonstrates that the owner has faith in the sustainability of the business.

•     •     •

These are a few of the ways in which you can join the small-business community without building a business from the ground up. However, as I noted in the previous chapter, your mindset, motivation, determination, and personality are integral factors in your ability to succeed. In addition, the business-building principles in the subsequent chapters will be equally important to the health of your new venture.