So You Want To Start a Business – It Costs Less To Not Open a Business

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.

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So You Want To Start a Business? Basic Mistake Number 2.

Basic Mistake Number 2: Not knowing how to price your product or service.

If you’ve been following my blog then you already know basic mistake number 1 and that early on in with my business startups I’ve made quite a few mistakes. Bear with me as I try to help others not make my basic mistakes. Now,  I could tell you how to get by this mistake without calling your competition and asking them for their menu of prices; which by the way, also tells them that you are a competitor and not a prospective customer. If I told you, then that would be easy. I’m going to save that one for my “business shortcuts” section. What’s more important is how this insidious mistake will put you out of business and of course, cost you money. Here’s how I learned.

The year was early 2002. I decided to start a computer on-call business. My target market would be small businesses and home computer users. I had the skill so why not do something I’m good at and enjoy doing? Makes sense. I took out a business license (sole proprietor), a couple of pennysaver ads, made up some flyers, and then pounded the pavement looking for work. I had no idea what to charge except to say that if I did virus removal it would cost $X. If I did an application installation it would cost $Y, and if I tuned your computer to make it run faster it would cost $Z.

Although there were a handful of people running the same type of business as I (this was before “geeks on call” or even the business model became popular), I did not check their prices. I was shy and didn’t want to call and ask so I charged whatever I needed to charge to get the business. It took me less than 6 months to go out of business. Here’s why:

  • I didn’t charge for travel time and if you’re not doing that then you’d better work pretty darn local or have prices to compensate.
  • Computer work can tend to take longer than an hour. I wasn’t charging by the hour. I was charging by the job.
  • I wasn’t pricing parts to make enough of a profit.

Put it all together and it’s easy to see how I could be working 4 – 8 (including travel time) for $50. Add gas money and vehicle maintenance and I may have actually lost money on some jobs. Also, seeing as that it is a computer business, I had to pay for professional courses to maintain certifications and learn the latest techniques.

It’s easy for the reader to look in retrospect and see how silly it all was on my part. Bear in mind that I was just starting out. You may or may not have done the same. Even now, in my present business, I see quite a few newbies underbid projects in the hopes of future work or just to say they have a customer. What you may really like to ask then is this: How much should I charge for my product or service?

I’m not going to tell you yet. You’ll need to read my blogs but I’ll leave you with this. It’s not what the market will bear. Why is that? Because you can charge market rates and still go out of business. Those of  you more experienced understand the latter statement all too well. Those of you starting out in business will make the mistake (well it’s not really a mistake because it’s conventional wisdom) of charging market rates to be competitive. Your business just doesn’t work that way and neither does mine. I’ll go into it at another time but for now let’s not make this a race to the bottom.

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So You Want to Start a Business?

I’m not business coach but once I hired one. I’m not the most successful business guy in the world or even my town but I’ve started my fair share of businesses. I’m in my upteenth iteration of a business model and I’ve decided that I’d like to share my experiences so that others can read and gain from what I’ve learned. What you read here is the unvarnished truth – at least as far as my business is concerned.

Ever ask someone how business is? Usually you hear good things. Now think about it. How could that be if 80% of all businesses fail in the first year. For restaurants the failure rate is 90%. Really, nobody wants to say that they’ve made a mistake opening up shop so don’t bother asking how business is unless you want to make small talk. Nevertheless, there is that small 20% that does OK.

 I opened my first business more than 10 years ago. Actually, I didn’t open one up I fell into it. I was working as a computer consultant and had the opportunity to go independent. In consulting terms that means I would be my own consulting company. I viewed being an IC as just another job – big mistake. My computer skills were top notch but my business skills were bottom notch.  In fact, I didn’t realize I was in business. I thought I had a job. Let that sink in a bit because it’s important.

The computer industry was changing. The first wave of computer programmers were coming in from India and that meant that jobs in the computer biz were starting to become scarce. I saw it coming but thought I’d be OK. The second wave was the Internet. Employers did not bring programmers in from overseas in the numbers they had before. Now they can work from anywhere in the world! Jobs became even more scarce. This was where I began to have problems.

I was between gigs. I was on the beach. It was Sept 7, 2001. Four days later the WTC attack occured. I lost contact with recruiters and employers as everyone scurried to get their houses in order. For those that were not in NYC at the time, it was horrendous. For a time there was no travel from outside NYC into NYC and communications were lost. It really was not a good time to look for a job. The economy also entered a recession. When the dust began to clear it was too late for me to find work.

Y’see I was technical and the loss of even a few months work and all I heard was “not current”. Technology changes rapidly and contrary to general advice, taking an Oracle Database class at night does not make you current nor a database administrator. Employers tell you they like to see you do these things but I think, in the end, it doesn’t amount to a hill of beans. I simply couldn’t find work.

Here’s the first lesson in business learned from this story: Whether you work for someone or not you are always in business for yourself. Just decide what business you are in.

Posted in Business, Business Coaching, business startups | 2 Comments