Thinking about becoming an entrepreneur? Want to work for yourself? What are the choices? How do I decide? Where do I go for help?
And, WHAT IS AN ENTREPRENEUR?
An Entrepreneur is an individual who takes an idea, product or service and turns it into a business. An entrepreneur can start a business, buy an existing business, acquire a franchise, or pursue their entrepreneurial interests by working in various employment options.
You can become an entrepreneur by becoming an independent contractor, part time employee, seasonal employee, project work or by self employment. Future trends indicate a growth of 40% in this area over the next few years as company needs for staffing expand and contract. You can be “self employed” but under contract to one or more businesses all at the same time. As business needs change your commitment to one of the employers may change but you remain basically self employed.
The advantages to concurrent employment strategy are many. It’s a good thing to have multiple income sources. Let’s say one of your employers loses a big contract, you lose this source of income but by having agreements in place with other employers you still have income opportunities. The variety of assignments, locations and work can keep your interest up without the fear of burnout. You can also be choosy about which assignments to accept, if you’re in reasonably good shape financially you can also take advantage of extended vacation time. Some employers will also offer contractors and part time employees the options of paying for corporate benefits to cover health insurance and even retirement plans.
Disadvantages must also be considered. Even though the ability to choose assignments might sound attractive you have to live with inconsistent income levels. We are not all expert money managers and being dependent on that regular pay check may have lulled you into a false sense of security. The mortgage must be paid, the kids are going to college, the car seems to break down at the most inconvenient time so be sure to manage your personal finances accordingly. Contract workers cost companies less than full time employees but they are often the first to be cut if cost reductions must be made. One more comment on the financial side, if you are a 1099 employee or are paid through your own business, be sure that you account for income tax, social security, business expense and keeping good records for your billable time.
You can stop at Kinko’s this afternoon on your way home and have some business cards printed with “Consultant” as a title and tomorrow morning you’re in business. However, the dark side to this strategy is that you must have a program, an offering to garner business. Also, be aware that executive recruiters and human resource professionals long ago caught on to prospective employees using “independent consultant” on a resume to cover gaps in employment. Make sure you have a track record that can be documented if you go this route. However, if you have specialized skills that are valuable, consulting can be lucrative and an enjoyable experience. You can make contributions but not have all the baggage of extended involvement. From a personal standpoint, being an independent consultant can be a lot of fun. And, it can be scary as heck too!
The advantages to consulting include quick entry, relatively low start up costs, you can be full time or part time, the hours are flexible and you have that wonderful independence and freedom to choose engagements.
Disadvantages to consulting? Those low startup costs are easy to underestimate, you may have inconsistent income, especially in the startup phase. Marketing effort is considerable and not compensated, the old adage for consultants is when you’re working and billing you’re not marketing but when you’re marketing you’re not getting paid.
When considering what your billing rate should be, include time to market. For example, let’s say your set your rate at $60 per hour, a moderate rate. At full billing for a year at 2000 hours that’s a decent income level. However, if you only are billing 1000 hours and market for 1000 hours then your effective hourly rate just became $30. Maybe not so good. Independent consultants usually must provide your own health and retirement benefits which can be very costly, again, consider these expenses when determining your hourly rate. You must have a service that is in demand and for which people/businesses are willing to pay. Do your homework and have a business plan which describes in great detail your service offering. Consulting businesses rarely become a saleable asset, when it finally comes time to take off your boots for good and ride off into the sunset, don’t count on selling your business to someone, you usually are the business.
STARTING A BUSINESS
What about starting a business from scratch? It’s your dream, your idea, your vision….maybe you can be the next Bill Gates! Big Maybe!! Be sure to research your idea thoroughly, test market, determine in advance if people will really buy what you will be selling. There is a lot of help available, the SBA (Small Business Administration) offices will offer outlines for business plans, they will sometimes offer workshops on financing and other counseling. The Small Business Development Council often has offices at local colleges and universities where a great deal of information and classes can be found.
Advantages here can be huge if you’re successful and include significant financial rewards and a high degree of personal fulfillment. Businesses that start small can be expanded and grow to considerable size. Branch locations can be opened and sometimes the concept can be franchised. Your business can become a financial asset for sale or pass on to heirs.
Those pesky disadvantages must also be considered. Businesses startups have a very high failure rate. Less than 37% of start-ups are still in business after 5 years and this can result in financial disaster for the owner. You must develop the business model from nothing and you have to learn as you go. The ability to acquire financing is questionable, in fact, financing for your “world changing” idea can be darn hard. Demands on your time and energy can be excessive, don’t expect to start a new business and rack up only 35-40 hours a week. Sure, it can and has been done but that situation is very rare. Financial success usually takes much longer than expected, your financial plan may forecast earnings in a few months but most new businesses lose money the first year or two and the generally accepted rule of thumb is three years to get your return on investment back and turning a profit. All of which does not include paying yourself a livable salary. And last, but probably not least, shutting down a business in which you’ve invested your life savings and thousands of hours of personal time and effort can be emotionally devastating.
BUY A BUSINESS
Ok, so why not go out and buy an existing business? Not a bad strategy and we’ll jump right into the advantages and disadvantages. The advantages include the business may have a local brand and is well known and established. The business is in operation with real customers and real revenue. The current owner may be willing to finance and train and support you as you assume ownership. It’s likely you would have immediate income, always a good thing. The business may be running so well you can assume a passive ownership role and not be directly involved in day to day operations. A well run, existing business has immediate value and can increase in value. Business brokers are available to help find something in which you’re interested and have the requisite skills to manage.
But, Whoa Nelly, let’s also consider the Disadvantages. First, there is no organized buying market. It’s a lot of work to find the right business and may take an extraordinary amount of time. Be sure to find a reputable broker. After all, the broker’s job is to sell the business not guarantee your success and satisfaction. It can be difficult to determine the financial stability of the business, there are lots of ways to hide problems and, “surprise, surprise Gomer”, some business owners are just not honest folk. Financial disclosure is not standard and you must have professional financial assistance. That immediate income and revenue stream sounded good but the upfront investment to assume ownership can be very costly and your debt service can be difficult to cover with current revenues. The reputation of the former owner can be negative so be sure to check around the community to see how the business is viewed because you buy the reputation along with the business. Again, running a business will likely require significant personal involvement and commitment. Be sure to budget for assistance from professionals to complete due diligence, legal as well as financial. Lastly, be honest, you may not have all the skills necessary for success. You may be a great manager and administrator but can you sell? Sales are the lifeblood of any business and must be viewed as a positive factor in the process.
BE AWARDED A FRANCHISE
Become a “Frantrepreneur“, a cross between a traditional entrepreneur and a modern franchise owner. You possess the desire to be a business owner without the desire to recreate the wheel. You are willing to follow a proven system for the benefit of personal and professional goals.
The Franchisor provides a proven business plan, systems, support and training. No start from scratch here, they’ve worked out all the “bugs”. Other advantages? Franchise fees are fixed and regulated by government disclosure requirements, the Federal Trade Commission runs a tight ship and has strict standards that must be maintained. Detailed information is readily available. Franchisors want long term business partners, they are looking for individuals that will have the drive, determination and energy to achieve lasting success. A franchise must be awarded, not just purchased. Winning a franchise can be compared to securing an employment offer.
Yes, franchisors charge a franchise fee for entry but they don’t make a profit from the fees. The franchisor wants you to be successful as they will receive a royalty on the gross revenues of your business operation, that’s where the profit is for the core business. There is no cost assistance available through franchise consultants and the franchise fees are not affected in any way by utilizing the services. A franchise consultant will match you to the best fit for success! Franchisors actually prefer receiving a prospect from a consultant because the prospect has been screened and is qualified from a financial aspect as well possessing the requisite skills and background for that business. The startup time is comparatively shorter than opening a business on your own. Financing is attractive to lenders, back to the proven business model, financial institutions have more confidence in franchises than startups. A franchise business can become significant asset for resale when you’re ready to move on. The future trend is very strong and the wide variety of franchise concepts offers many, many choices. Risk? Much less risk than a startup and in the long term view, probably less risk than seeking “permanent” employment. There is no such thing as job security.
Ok, I must also cover the disadvantages as well, so here goes. If you are a strongly independent, true entrepreneur, then a franchise is not a good fit. You must follow the system for success. That’s one reason why franchisors like former military and corporate types, you’re used to following a system! You must conduct due diligence in the acquisition stage and using a franchise attorney and a trustworthy CPA is just as important here as in acquiring an existing business. Some franchisees come to resent paying the ongoing royalties to the franchisor. The royalty is usually 6-8% right off the top and over time, owners sometimes forget what all that royalty pays for, usually for less than an individual business would pay for the same services. There is usually a renewal clause in the franchise agreement, five years or ten years out, another fee is paid to retain the business. Why? Remember the royalty? The franchisor wants the franchisee to continue growing the business and growing that royalty. Often the franchisee reaches a level of revenues and subsequent income that is comfortable and resists continued effort and investment to grow the business. Therefore, the renewal clause, keeps the franchisee involved or forces them to sell out. Think of it as an aggressive exit strategy.
There you go, choices, choices, choices. How to decide? Which is most appealing to you? What’s your passion? Can you make a living and achieve the lifestyle you want by pursuing one of these paths? Add it up. Determine what is best for you and your family. Make sure you have spousal support. Then go where you think is best. Sorry, there’s no easy answer, it comes down to what you think is best for you and yours.
This is what we do at Axxiom Franchise Advisors! Contact us to get started exploring your own choices!