Yesterday, we talked about Jerry. He’s 57 years old and is losing his job. People who find themselves in Jerry’s situation often consider opening up their own business. Let’s explore that option.
You may have heard that 95% of small businesses fail within five years. This is not true. According to the latest statistics from the Small Business Administration (SBA), “two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years.” So opening a business isn’t the death trap we all thought it was. Bottom line, new businesses have a 50/50 chance of surviving for five years or more.
I think you can do better than 50/50. You can start improving your odds by avoiding the mistakes that I made 15 years ago when I opened my business.
1.Start the business for the right reason.
The idea of being self-employed appealed to me. I opened my own shop because I didn’t want to sell the junk the bank wanted me to sell and I wanted more control. Those were good reasons. I also figured I’d make at least as much money and work fewer hours as I did at the bank. Mistake!
I made less money and worked longer hours for several years – something I didn’t bargain for. Most business owners report the same thing, so be ready.
But here are a few good reasons to open your business:
a. You really love what you do.
b. You have what it takes physically and mentally to overcome the challenges. People often overlook this, but health problems are a leading cause of bankruptcy. Don’t take on more than you can handle.
c. You have the motivation to keep going when others around you quit. It’s not a question of “if” you’ll face challenges but “when.” Most successful businesses experience many failures before they hit pay dirt. Can you handle that?
d. You love to be independent and you don’t need someone else to provide direction. You have the skills to take charge. You are creative and don’t crack under pressure.
e. You’ve done your homework. You know that your product or service will really fill a need in the market that’s currently not being served.
2. Don’t overestimate your abilities.
I felt comfortable with my ability to help people manage money. But I didn’t even think about the other skills I needed, such as hiring and managing employees. For years I hired the wrong people and failed to train them. If you ever watch Sponge Bob, think Mr. Krabs and you’ll get a clear picture of my management skills early on. As a result, I had to work longer and harder and I wasted tons of money. If you want to save yourself about eight years on that learning curve, read The E-Myth Revisited by Michael Gerber.
It’s great to be in touch with your positive traits, but you also have to be aware of your limitations. Recognize what you don’t do well and get help. If not, you’ll face disaster – soon and certain.
3. Pay attention.
I wrote about the marketing program I used to start my business. It was expensive, but it worked – at least in the beginning. After a few years, things changed. The marketing program no longer yielded the same results. Of course, that didn’t stop me. I kept using the same marketing program for a year after it was clearly dead in the water. That mistake also cost me a fortune.
When I started my business, I only had enough cash to support my business and my family for three months – that was it. My wife had gone back to college and it was all up to me. I did have clients before I made the move. I wasn’t too concerned about my low cash reserve, but I should have been. Things were slow out of the gate and I had many sleepless nights worrying. Make sure you know how to get working capital for your small business.
Don’t underestimate how much money you need. This is the most common cause of business failure. Also, be realistic when it comes to expected revenue.
5. Location, Location, Location
Location is one key to owning a successful small business. My clients were used to seeing me in a nice Beverly Hills bank lobby. When I started my business, I worked out of my house and went to see them in their homes. What was I thinking? I lost many good clients as a result. If you have a business that is struggling, a great location might help. On the other hand, even if you have a great business, the wrong location could ruin you. Think about where your customers live, parking and lighting, location of competitors and local demand for your product or service.
6. Have a good plan, Stan.
When I started, I didn’t even know what a business plan was. If I had a “plan” it was to take care of my clients. That was it. At the end of the day, things worked out fine but it would have been a much more enjoyable experience if I’d taken the time to create a formal business plan. A business plan forces you to think about things (problems and challenges) that you otherwise would not have considered. It will slow you down…and that’s a good thing. Business plan software is cheap and the money it will save you could be enormous.
I met one gentleman who invested over $500,000 into a business and only then thought about the need for liability insurance for small business. OOOPS. He found out he couldn’t get it. Oh well…what’s $500,000?
When it comes to your business, you are the “secret sauce.” Don’t start unless failure isn’t an option. Most self-made millionaires aren’t any smarter than you or me. What sets them apart is their openness to new knowledge and their willingness to learn whatever it takes to succeed.
In closing, I have to admit one thing. Had I done all the things I mentioned above, I might have gotten stuck. Maybe I never would have left the bank – and that would have been a shame. I love having my own business. But I can tell you that if I had done at least some of these things – even half-baked, my transition would have been smoother.
What about you? What were the best lessons you learned when you opened your business? Would you do it again? What would you do differently?