Starting a business may be your “American Dream,” but it is not for
the faint of heart. Sometimes the best decision about starting a new
business is not to start one at all. Consider these sobering statistics.
Over 600,000 companies with at least one hired employee are started
every year, according to the Small Business Administration. Of these,
two out of three survive for at least two years, but only four in ten
last for six years. A 40% survival rate should wake up any business
person.
Despite these odds, there is always a
fresh pool of entrepreneurs-to-be, and they come from all walks of life:
young professionals with a hot technology idea, middle-aged executives
tired of the corporate grind, retirees bored with retirement. Commonly,
their approach is, I’ve got a great idea for a business, now how do I
find the money to start it?
Stop right there. Certified Financial
Planners™ professionals often say that the first questions should not
be how to get the money, but whether to start the business at all. In a
recent article from the Journal of Financial Planning, a planner said
she had talked more clients out of starting a business than she had
talked into starting one.
One of the first key factors that should
be addressed well before the question of financing, is time. Not timing,
just time. Budding entrepreneurs typically do not realize the huge time
commitment it often takes to launch a new business. It means having to
balance your personal life with the new enterprise and often another
full-time job. According to Global Entrepreneurship Monitor, two-thirds
of new business owners hold full or part-time jobs during start-up. The
idea of not giving up the day job seems to have sunk in. While that is
good it complicates the time juggling while getting things going. Are
you willing to commit the necessary time and energy? Equally important
is the impact on those you love. Are they comfortable with the time
commitment? Planners say executives and retirees often bow out when they
realize how much time a new business can really take.
Another key early question is whether
this proposed business would fit your overall family and financial
goals. Will the business drain funds from other worthwhile projects such
as saving for a child’s college education or saving for a new home?
What critical family benefits such as health or disability insurance
might be lost if you leave your current position?
Retirement is often another competing
issue. It is common for mid-career workers to start a business not only
to provide current income but with the idea of selling it down to road
to pay for retirement. That is potentially riding much of their nest egg
on a single investment. Worse, many new businesses are financed by
raiding existing retirement accounts. This may well result in a later
retirement not an earlier one. Are there better ways to save for
eventual retirement than starting a new business?
The answer to the above questions may be
found in a business plan for the new venture. This structural blueprint
documents the factors for the business plans as a necessary step to
getting financing. But before taking it to the bank, look at it
yourself. Do you have what it takes to make it happen in both time and
money as well as creativity? If not, scrap it before you get hurt. If
you think it is doable then start putting together the financing.
Getting adequate funding is certainly a critical step to making a
business successful.
Undercapitalization of startups is often
cited as a major cause of failure. Here at the beach, everyone must plan
for the off-season as well as summer. No bank or group of investors is
going to fund the whole thing. Business owners must have some cash to
put into the venture. The more you have the easier it is to find the
rest. Use the business plan to make smart decisions.
One of the financial planners interviewed
in the Journal of Financial Planning article said that several years ago
he was thinking about starting his own equipment rental company. After
preparing a formal business plan, he realized he would not turn a profit
for at least five years. The idea was dropped. Another planner did a
break-even analysis for a client wanting to start an electrolysis
school. She discovered the school would have to be continuously 100%
enrolled in order to survive.
Thus, before racing out to secure
financing, choosing a business form, location etc., carefully analyze
whether the business is really worth starting in light of the time
commitment and financial risk. The nearest U.S. Small Business
Administration office can be a good place to start, and don’t forget
other business people who have already been there.
This column is produced by the
Financial Planning Association, the membership organization for the
financial planning community, and is provided by Alexander G. Yearley,
CFP, a local member in good standing of the FPA. Mr. Yearley runs
Community Pride Financial Advisors at 39 Baltimore Ave. Rehoboth Beach
DE 19971 and offers securities through Cambridge Investment Research,
Inc. Member NASD & SIPC.
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