I’m looking back over about 15 years of being in business for myself. I’ve been a software consultant, I’ve owned two brick/mortar businesses, and I now work from home. I’ve converted my brick and mortar business into a home-based business and now make more money than before. I’ll discuss how I’ve done that in subsequent blogs but for now, I’d just like to say that looking back, it probably – no I take that back, it would’ve been, cheaper for me to stay home. The politics of collecting unemployment or other government benefits aside I”m simply going to discuss the math of opening a brick / mortar business. The math is simple.
What’s the first, second, and third rule of opening up shop? Location, location, location. We’ll assume a middle of the road location. Now here’s the fourth rule of opening up shop that any business owner can tell you (as my father did also): Your landlord is your partner. Now let’s look at what type of business to open. Let’s open as an LLC, a Limited Liability Corporation. It’s typical for a business owner to use the latter legal form. This way we can’t be sued for money if we default or our company is sued. That’s what your accountant says and that’ s what the experts tell you. Frankly, it’s the way to go but there’s a big but here.
- Very few banks will give you credit as you don’t have a track record. Therefore, you need to sign papers giving the bank a personal guarantee.
- Your landlord will probably not rent to you unless you sign a personal guarantee.
A personal guarantee means that your home etc is up for grabs if you don’t pay your bills regardless of whether you are a LLC or not.
Now it’s time to rent a location for our business. Let’s assume some numbers. Unfortunately, they can vary wildly from state to state but I’ll use fairly accurate numbers for my neck of the woods. A typical monthly rent, including utilities and insurance will run somewhere around 3K per month. Annually that’s a nut of about $36,000 and you haven’t made a cent yet. Leases can be “iffy”. If you take a 3 year lease then you’re liable for 3 years of rent. If you take a 5 year lease then you’re liable for 5 years of rent. This means that if you close before the term of your lease is completed you are liable for the balance of the rental. On a 5 year lease, the day you sign you are liable for $180,000.00. I know a few that have closed and I can say that their liability was limited to reasonable time to re-rent the location. Sometimes reasonable can be 6 months and sometimes a year. Usually your landlord will settle because of the headache of legal expenses and time.
Assuming you’re not opening a franchise or business opportunity (which adds to your initial costs), you will typically have to “build-out” your location. You can figure about $5000 to $10000 to build-out. Now triple that number. I’ve seen two types of business owners. Those that don’t care what their business looks like when people walk in and those that do. Hopefully, you’re in the latter group. Don’t do this on the cheap. You only get one try. Do it right, do it with style. So figure you’ll overspend the initial $5000 to $10000.
You’re almost ready to open. Have you forgotten advertising. An add in the local paper can cost $250 – $500 a month. What about stocking your place with product. I don’t know what type of business you will open but you do need something on the shelves. Will you need help or will you be the sole person working 6-7 days a week for 12 hours a day and then coming home and doing your books and other exciting paperwork. Sounds like a recipe for burn-out.
The point is the expenses keep building before you’ve even sold something. Now let’s do some more simple math. I call it the rule of 3. One-third labor, one-third expenses, one-third in the bank (or pay of loans or whatever). It usually works but it really depends on your margins. Let’s say (new numbers unrelated to the prior numbers) your expenses run about 60k annually. The rule of 3 tells us that you will need to gross $180,000 in your first year. If not (which most don’t), the liability passes to the second and subsequent years until you have finally covered your costs for personel, cost of goods, fixed expenses, and more. Are you seeing what’s happening? What you owe is going up from year to year.
What I have just related is why 80%-90% fail in the first year. It’s called being under capitalized. Now think about how much money you would’ve saved sitting home just watching TV. I’m done with making my point.
I don’t want to dussuade others from opening a small business but I don’t agree with the conventional and simplistic wisdom spewed forth by some. Many have opened businesses and credit goes to them. It’s important to have desire and faith in yourself and your business as well as plenty of money.