Everyone wants to cite the benefits of failure as a great learning experience. And no doubt, it can be that. Yet nevertheless, it’s never fun to go through, and it can be really costly on many fronts. So my goal has always been to avoid it.
That said, owning your own business can be risky. We have all heard about the high failure rates for new businesses in the first five years of operation. Entrepreneur Magazine claims 20 percent of new businesses fail in the first year, and more than 50 percent fail in the first five years. In my opinion, owning your own business is less risky than having a job, however, because you can lose your job at any time even if it is not your fault. That’s like being self-employed but having only one customer. Never a good position to be in!
So, let’s take a look at some of things you can do to increase your odds for success in your own business:
- Go into a business that has proven demand.
- Go into a business that takes less capital to start.
- Buy an existing business vs starting from scratch.
- Buy a franchise.
- Go to work for a business that does what you want to start or buy for yourself.
- Test out your business concept while you still have a job elsewhere.
- Get all the credit you can while you still have a job.
In a nutshell, that means don’t invent something new. Many people—particularly younger students of entrepreneurship are operating under the assumption that they MUST invent something new. But that increases risk. While I don’t advocate starting the 32nd Mexican restaurant in a town that already has 31 of them, one thing is clear. There is a lot of demand for Mexican food in that town. So IF yours is different and better than what else is available, you may be able to expand the market or take business away from other businesses that already exist.
Usually that means some kind of service business that doesn’t require big facilities commitments or unique facilities, nor require expensive equipment to get started. That will reduce your risk dramatically.
The emphasis in all forms of media—when it comes to entrepreneurship—is on startups. Yet, one of the three “doorways to entrepreneurship” is to purchase an existing business. The good thing about buying an existing business is it is proven. It has clients or customers, employees, facilities, inventory, and a history you can learn from (although never count on accuracy in numbers provided by small business sellers!). There are other advantages including the possibility you can buy already depreciated assets and you may be able to get the seller to finance the whole thing whereas a cold start could have a harder time with that—and others I won’t elaborate on here. But there is no doubt in my mind buying a proven business is less risky than a cold start.
This is the third doorway to entrepreneurship. A good “business format” franchise (as opposed to what is referred to as a “product and trademark” franchise) provides a business plan in a can. The franchisors will have facility designs, sources of supply, provide management and employee training, and much more. You can also talk to other franchise owners and observe their businesses. That will reduce your risk.
This will not only reduce your risk of failure once you have your own company because of the training and learning opportunities you will have, but it will also help you understand whether or not you even like that business which is also critical to your long term success. Learn on someone else’s dollar.
While this isnt always possible because of the time or monetary commitment your new venture will demand from you, it often is, especially with service businesses or internet-based businesses. Even if it isn’t in the same business or industry you want to go into, you will at least have a paycheck while you are testing the market to see how it responds to your concept. That will help you be able to live on less and take less out of your business. It will also help you secure credit if you need to borrow money for your venture and reduce your risk of inadequate capitalization.
Arrange for a home equity line. Get some new credit cards with cash advance availability. Increase the credit limits on the cards you have. Do all of this when you have a job and you will have a safety net later when you have your own business and have tight cash flow. Once you quit your job and go all-out into your new venture it may prove to be much more difficult to get credit.
I’m glad I learned a lot about statistics and probability theory when I was in business school 40+ years ago. What I learned from those classes has helped me make better decisions and has been foundational to any success I enjoyed over the years in businesses I started or acquired!
Post Author:
Mark Zweig – a leading expert in management and business for the architecture, engineering,
planning, and environmental industry – is president of Mark Zweig, Inc., which has been named to the Inc. 500/5000 list of fastest-growing privately-held
companies; chairman and founder of Zweig Group – named to the Inc. list three times – and entrepreneur-in-residence teaching entrepreneurship
at the Sam M. Walton College of Business at the University of Arkansas.
