Monday, December 26, 2011

WSJ: 10.25.2011 (Posted for Joe V.)

  • The Wall Street Journal

Executive and Author Shares Dos and Don'ts of Starting a Business

Luke Johnson, chairman of private-equity house Risk Capital Partners, has made a success of businesses as varied as the Pizza Express restaurant chain, the Riva chain of bingo clubs and dental-surgery group Integrated Dental Holdings. Mr. Johnson, the author of "Start It Up: Why Running Your Own Business is Easier Than You Think" shares his 10 key tips for getting a business off the ground.

Before leaving your job for a new venture, consider moonlighting or going part-time. A steady income to cover personal overheads can be a life-saver while you develop your concept. Few new companies can afford to pay their founder a decent salary at the beginning. It will mean working on your new project at weekends, evenings and holidays—but then no entrepreneur ever made it without trade-offs.

Always write a comprehensive business plan. Even if you don't need a business plan to raise cash, it's worthwhile to express your thoughts in a coherent way in written form. A plan should include a timetable, a description of the product and potential customers, the capitalization, biographies of the key management, and financial projections—as a minimum. The plan shouldn't be longer than 20 pages, but it must include all the key details.

If you haven't already recruited a partner, look into it. Teams are generally more likely to succeed than one-man or -woman bands. A partnership will be seen as a better proposition by capital providers, and a combination of skills and resources is more likely to overcome the inevitable challenges facing any new firm. I have always worked with partners—being a sole trader can be a lonely occupation, and the journey is always more enjoyable if you have a colleague with whom to share it.

Never give a bank or landlord a personal guarantee. There is almost always another source of funding, or another property to occupy. When you sign a personal guarantee to a lender, you risk being made bankrupt if the business fails. Too many first-time entrepreneurs agree to such bank demands when they should say no. Sometimes the bank will still extend the facility, but sometimes it will be necessary to look elsewhere for financing.

Do what you know. Don't plunge into a new sector without having done extensive homework—or preferably having worked in the field. Most entrepreneurs who do well have studied the technical aspects of the industry by working in it before breaking off on their own. That way they gain contacts, credibility and an understanding of customers and the particular economics of their preferred niche.

It's the execution, not the idea, that counts most. Lots of would-be millionaires believe they have a world-beating business concept. But a dream is just that, unless it is translated into concrete and practical action. Passion matters, but commerce is at heart a pragmatic exercise, not an emotional one. Before deciding to become your own boss, be sure you are willing to do the gritty essentials, like selling and bookkeeping. It is not a career for the faint of heart or the chronically shy—or indeed the idle.

Don't take a franchise. Very few franchise offerings represent good value, and those that do, like McDonald's, are generally oversubscribed. Many franchises don't deliver on their promises, and have an obvious formula and a mediocre brand—for which franchisees pay through the nose. The point about working for yourself is that you enjoy freedom and independence—it's hard to do that as a franchisee.

Creating a real business takes time. Few companies do well quickly—most take years to cultivate their customers, perfect their services and generate sustainable profits. This means entrepreneurs need both a sense of urgency, in order to make things happen, and a degree of patience. Many start-ups have to reinvent themselves to discover the right business model—often several times. All this requires perseverance and flexibility over the long haul.

It's not just about the money. Few entrepreneurs start a business just because they want to be rich. They do it because they want to build something, because they see an unexploited gap, because they have no choice, because they have a point to prove, because of the thrill of making something from nothing.

Of course, positive cash flow and the profit motive are integral—no business survives that loses money. But the high achievers know that being vitally engaged in something worthwhile is what really counts.

Be prepared to make sacrifices. Quite a few entrepreneurs I know reckon they earn less working for themselves than they could as an employee. They do it because they love the life, and couldn't bear the bureaucracy and office politics so prevalent in so many large organizations. But be sure your family support you in your adventure, and that you have the stamina and desire to see it through. It is unlikely to be an easy ride, but I have found the rewards to be worth the price.

—"Start It Up: Why Running Your Own Business is Easier Than You Think" was published in September by Portfolio Penguin.

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