The startup as a career path – Part 1: financial analysis and the stand-alone business versus franchise decision
I have written about entrepreneurs and their companies in several places in this blog and especially as organized into Startups and Early Stage Businesses. That makes sense as I have worked with quite a few startups and early stage enterprises over the years and with a fairly broad range of entrepreneurs and would-be entrepreneurs. I will add that the issues and opportunities of startups and of building your own business have come up repeatedly in the News this past year and more, as a career path alternative for the long-term unemployed.
Most mainstream press coverage on this has been fairly superficial, with an emphasis on national statistics for measures such as the percentage of gross national product (GNP), or percentage of new jobs created that come out of new and small businesses – these numbers are impressive. Very little of that coverage has, however, also delved into the challenges and issues of actually taking this route, either as a business founder or as an early on-board team member of a newly forming business.
I have touched on some of these issues and in both my Startups and Early Stage Businesses series and in my ongoing Guide to Effective Job Search and Career Development but I have to admit I have not brought the two sides to this together in a single place and with a connecting analysis either – up until now. I am sure to come back to this general subject area again and probably many times but I wanted to focus on one key aspect of it here and now: identifying the most important financial reality check issues, pro and con that will and do arise when pursuing a startup career path. In a sense this posting is a direct continuation of a recent posting:
with this posting more directly oriented towards inclusion in my Guide to Effective Job Search and Career Development and not just as a supplemental entry there.
In that earlier posting I mentioned career paths in passing and I also parenthetically mentioned issues such as stand-alone versus franchise. I am going to focus more specifically on these and related issues here, as well as startup funds and burn rate – the rate at which funds are expended in a startup before the break-even point is reached when incoming revenue is sufficient to cover expenses going out.
I want to start this discussion with a term that many know, but that is not always considered first and foremost in deciding on a startup path: liquidity. The expression “it takes money to make money” comes to mind here, as borrowed funds and leveraging aside you do need to be able to pay the bills as they come due. And I note here that ultimately, borrowing and leverage are both forms of expending what you do not have the cash to cover on your own now with hopes of covering for that before you run out of ability to do so. (Nota Bene: The earliest reference I know of for this is quoted expression is from “A letter from California” to the Connecticut Courant of Hartford Ct, first published by that newspaper on May 18, 1850 though this line is probably much older than that.)
I bring this up because when you start a new business venture, you are going to go through a period in which money is going out the door, but nothing is coming back in to replenish your startup funds let alone draw against as profits or personal income. You really do need money to make money here, and even if you get it by borrowing from the bank and from all of your friends and relatives as well as tapping into your own savings and investments.
• Develop a business plan, and definitely be sure to work on the Financials section so you have as good an understanding up-front as possible as to what your expenses are going to be like and for at least the first year and with a realistic percentage of extra expenses accounted for to meet unexpected needs. (See Online Store, Online Market Space – Part 9: business plans and filing in the gaps and I strongly recommend that you get and read a reference work on how to prepare and write an effective business plan – I cite a book I have found helpful in that posting.)
• Make as realistic an assessment of what funds you will have available to keep you and your embryonic venture going through your early, pre-income and pre-break even stages.
• A good Financials section offers three scenarios – one slightly but modestly optimistic, one somewhat pessimistic where you have to deal with delays and other real-world setbacks, and a normative scenario which you develop last that outlines what you think most likely to actually occur.
• Set up two or three scenarios for funding availability, with any and all possible sources accounted for – but with less of them added in for your normative than for your optimistic and even less than that for your more pessimistic.
• Understand how the numbers compare and plan to build with goals and priorities and with time tables that make the numbers mesh. And I come back to that term burn rate here. Think and plan in terms of a Plan B in case you see that your assets available to build are dropping at such a rate that you are in danger of loosing sufficient liquidity to keep going before you start bringing in income and hit the break even point. You should have a well considered Plan A. Plan for a Plan B as well.
There are definitely a lot of people who will tell you that the “it takes money to make money” approach is obsolete but treat it like it was engraved in bronze and as absolute truth here. That is the more conservative and helpful view to take here. Think and plan any startup new career path with this in mind and in how to make those numbers work for you.
The other set of issues I said I would at least touch on here is that of the stand-alone business versus the franchise operation, and the above in fact addresses the stand-alone side of this, which you should do even if you start out thinking franchise. You will need your stand-alone options as a set of comparison points to accurately assess anything else by.
When you buy into a franchise system, you will most likely pay an initial set of fees up-front and you also take on an ongoing set of expenses that have to be paid back to the company that sells you your franchise license.
• Understand exactly what you will owe and on what schedule and under what terms.
• Know precisely what you will get in return in the form of build-in brand recognition and what that is or is not worth in the marketplace.
• Know what you can do and what you can purchase in the way of supplies and goods on your own and what you have to buy by contract from the parent company – and at what price points.
• Note that this can include sales inventory and supplies that go directly into preparing them. It can also at times include a surprising range of other expendables including but not limited to your maintenance and cleaning supplies and this is sometimes cost-effective for the franchise holder but it can also be more a profit center for the parent company – at the franchisee’s expense.
• Know if you will be getting an exclusive territory, and if so how big it is, and how secure you are that the company will not sell other franchises too close to you.
• Read all of the fine print and make sure you find and meet with other franchise holders from that organization – and not just the ones they offer you as references. Look up franchised operations from this company online and reach out to their owners to learn of their experience and both with this parent company and with this type of business and business model.
• What problems have they encountered and what support have they received? Would they do this again if they were just looking into franchise opportunities and knew what they know now? What terms would they seek to negotiate on?
• What can and will they share with you as to how long it took them to break even financially and have they done so?
And to connect this back to the first set of bullet points, run the numbers and see how they compare to what you would be facing if you were simply setting up your own stand-alone business. Which approach looks like it would be more cost-effective? Which approach looks like it would be more likely to succeed? And check with the US Better Business Bureau or its counterpart to find out how the parent company is rated. Do your research and due diligence on them before signing anything.
This is probably enough of a start on this for now. I will come back to this and to analyzing the potential positives and negatives of the startup as a career path. My second posting here will focus on taking a position as a team member with a startup.