BY: Jeffrey D. Jones, ASA, CBA, CBI
So you think that you are ready to start your own business, but are you really? Only about 2% of the adult population in the U.S. own a business. That means 98% of the adult population are what we call “closet entrepreneurs.” That’s people you dream about owning their own business, but don’t have the money and/or guts to do it. In the Houston Metro area there are approximately 60,000 new start-up businesses every year, according to the County Assume Name Records and the Texas Secretary of State records. Historically 50% of these businesses will fail in the first year and over 75% will be out of business before they reach their fifth year in business. The following issues are typical of why many start-up businesses fail.
- Under capitalization – Many entrepreneurs under estimate how much money will be needed to launch a new business and make it successful. It almost always takes more money to get started than most people plan for. Leasehold improvements, lease deposits, furniture and fixtures, tools, and inventory are just some of the start up expenses. Then there is a need for working capital needed to carry the business until it reaches profitability. This can often take up to three years just to reach the break-even point. Many potentially profitable businesses go out of business because they did not properly plan for the amount of working capital that would be needed.
- Going it alone – It’s difficult to build a scalable business if you’re the only person involved. While some small service companies may require little capital to start, the cost of hiring even one employee can eat up a big chunk of your profits. Yet working 60 to 70 hours per week trying to make your business grow can quickly lead to burnout. There are only so many hours in a day that you can effectively work. If your business is to grow, it will generally be done by hiring employees or subcontractors to do various aspects of the business. The solution is to make sure there’s enough margin in your pricing to enable you to bring in other people.
- Asking too many people for advice – It’s always good to get input from experts, especially experienced entrepreneurs who’ve built and sold successful companies in your industry. But getting too many people’s opinions can delay your decision so long that your company never gets out of the starting gate. Getting advice from friends and family who have never owned their own business can be detrimental to opening your own business. They are employees for a reason and do not have the entrepreneurial spirit. They are not risk takers and don’t understand those who are. Even well meaning attorneys and financial advisors can provide poor advice due to self serving reasons. An attorney once told me it is much safer to advise a client not to do something than it is to advise them to do something, because if the client does something like start or buy a business and fails, they will then blame the advisor rather than take the blame themselves.
- Spending too much time on product development, not enough on sales – While it’s hard to build a great company without a great product, entrepreneurs who spend too much time tinkering may lose customers to a competitor with a stronger sales organization. If you don’t keep one eye firmly focused on sales, you’ll likely run out of money and energy before you can successfully get your product to market.”
- Targeting too small a market – It is fine to try to corner a niche market, but your company’s growth will quickly hit a wall if the market you’re targeting is too tiny. If you are striving to service a racial segment or a special hobby cliental for example, you may have to expend your marketing efforts to cover a much larger area then you expect which will increase your marketing cost which in turn will affect your profitability. Pick a bigger market that gives you the chance to grab a slice of the pie even if your company remains a smaller player.
- Not having a business plan – Not having a business plan is like not having a map when traveling into unknown areas. If you don’t know where you are going, then any road will get you there. Knowing where you are going is critical when staring a new business. The primary reason for a business plan is that it forces planning. Many people jump into a new business with a great idea, but they have done very little research to determine if the world is ready for this new concept. Research is the key. Proper planning will include doing a market study for the products and services you plan to offer. This includes talking to manufactures and distributors of the products you plan to sell, talking to competitors to learn the pitfall of the business, and obtaining information from industry trade associations that often gather and report market data on the industry they serve. In the event you need to raise either debt capital from a lender or equity capital from friends and family, a business plan will show you have put a lot of thought into what you are attempting to do and these sources of capital will be more likely to invest in your business. A business plan should be updated on a regular basis as you obtain more information about your business; however, be careful not to over think your business plan such that you never get around to opening your business. At a certain point, you have to close your eyes and take the leap of faith.
About The Author:
Jeff is President of Certified Appraisers, Inc., where he manages the firm’s multi-discipline appraisal practice that includes valuation of businesses, machinery & equipment, and real estate. As President of Advanced Business Brokers, Inc. he and his staff have been involved in the sale of over one thousand small and midsize businesses since 1976. Jeff is the co-editor of two books published by John Wiley & Sons: “Handbook of Business Valuation” and “Mergers and Acquisitions Handbook For Small and Midsize Companies”. Jeff holds a Master’s Degree from Pepperdine University.