SURVEY THE LANDSCAPE of small business in America. Every year, amid the desolation of hundreds of thousands of businesses dying on the vine, will sprout a vast new crop. A record number, about 900,000, sprang up in 1981, according to the Small Business Administration (SBA). Within five years, half of these will have failed.
What feeds this frantic cycle? What makes one new business flourish? What sows the seeds of another's swift demise? Should we applaud the resilient spirit of the American entrepreneur or condemn his stupidity? And what can you do-- you who are on the verge of starting your own business--to beat the odds and stave off the reaper?
Answers, sometimes contradictory, are plentiful, too, each year. Several new books for the prospective business owner, though appearing to be the same old formulas for instant wealth and financial independence, have some truly valuable tips tucked within their green dust jackets. Others tend too much toward dismal diagnoses or bubbly elixirs to be of much assistance with the day-to-day nurture of a new enterprise.
If you are perennially an optimist and an opportunist--if, upon reading the SBA forecast on the rate of business failure, you said to yourself, "H-m-m, half of all new ventures will still be going strong after the first five, shaky years" --my guess is that you are a serious candidate for self-employment, if not already so established. Be Your Own Boss, by Dana Shilling (Morrow, $14.95) should have a reserved space on your shelf.
Shilling, by her own account, determined to start a business after becoming sorely disenchanted with the routine at Wasp, Wasp & Token, the composite of all the places she had worked with such promise after obtaining a law degree from Harvard. She cast about for a good book on the task facing her, read many, but found none very useful. So she wrote one to fill the void. And it does.
Especially instructive in Be Your Own Boss are lists, intended to reveal unmistakably what lies ahead: what the IRS and other government agencies will require, how to incorporate or create a partnership, what to consider when choosing a location, what sources of financing to tap, what ratios to examine to know how the business is doing. These are essential details and Shilling, apparently because of her legal and analytical skills, does a great job of elucidating them.
Shilling believes that anyone who wants to go into business is qualified; she refuses to describe the traits of a promising entrepreneur. She says that more will go wrong than the novice ever dreamed possible, but that more is to be gained (and not just money) than ever imagined. The means to that end is a departure from what Shilling considers the conventional route: high capitalization, immediate incorporation, heavy borrowing, high technology, and a hierarchical structure. She advocates, instead, astute management that will require less capital, reduced borrowing that will result in a practical budget, a healthy cash flow, and a more egalitarian working atmosphere. Shilling is particularly adamant about the effect of interest rates on the popular borrowing concept called leverage, that is, using someone else's money to generate a profit and show a huge return on your own small investment. When interest rates are high, she warns, they are likely to exceed net profits and the great return-on- investment ratio will only serve to disguise the disaster.
Though refreshing, Be Your Own Boss is not quite as "radical," nor are other sources of information, like the SBA, quite as obsolete, as its dust jacket proclaims. the SBA's Robert Dietsch says, for example, his agency has abandoned the old notion that undercapitalization is the primary cause of small business failure; lack of sound management is now identified as the major villain. (That finding not only agrees with Shilling's view. It works out neatly for the SBA, which has found itself in recent years with diminishing capital to lend to small businesses.)
Start and Run Your Own Successful Business, by Peter D. Cook (Beaufort, $14.95), and Diary of a Small Business, by Irene Smith (Scribners, $16.95), though less ambitious in scope and more anecdotal in style than Shilling's book, are likewise designed to take the beginner by the hand and lead him through the entrepreneurial maze which their writers have, more or less successfully, traversed. What comes across in these books is the sense of what an engrossing adventure it can be to run a small business really well. You get a feel for the actual dynamics, how closely allied are risk and reward, how varied and intense are the daily experiences of a business owner.
An early passage in Smith's Diary contrasts the fun of starting a business with the "hellish" task of managing it for survival thereafter. When she opened the doors of her Business Center, a service establishment which does all sorts of office work for other small outfits, Smith was ecstatic. She had 40 eager customers and put in a succession of 16-hour days. From there, her business quickly grew to a $500,000- a-year company. But, never having anticipated this "success," she was unable to finance the growth and almost went under. Smith temporarily lost the reins of her dizzying venture. She was still on the merry-go-round, but no longer having fun. The moral of her tale is not to confuse growth with success. She suggests you plan way ahead for growth, and enter the fray with sharp accounting skills and savoir faire in the world of business finance.
Cook is an accountant who makes his living by understanding the life cycle of small businesses: counseling managers whose adolescent companies have growing pains, watching for signs of serious financial ills, and putting honorably to rest the terminal cases.
Cook's first business, begun in 1974, garnered sales in excess of $1.5 million by its second year and it didn't succumb to that rapid rate of growth. Instead, Cook says, the business sold at the price he wanted--not the asking price, mind you--the price he had decided ahead of time he would settle for.
Cook knows all the seemingly insignificant, mundane details that add up to the profitable operation of a business. He supplies a generous dose of them in Start and Run Your Own Successful Business and in language plain enough for the uninitiated. His forte is long-range financial planning, especially how to reduce tax liability, raise capital (he believes in leverage), and constantly monitor the vital signs. This book explains why a banker is the person who will lend you money once you can prove you don't need any; but also how to increase your chances of getting some when you do need it.
"Just a minute," you say. 'I'm not quite ready for self employment. All I want is a little taste to see if I like the idea." Turn Your House Into a Money Factory, by Norman King (Morrow; paperback, $6.50), and its twin, How to Make Money at Home, by Judith Schoder and Sharon Shebae (Wallaby; paperback, $7.95), cater to the person hungry for a change in job or way of living, but hesitant. They provide a tantalizing menu of home- based occupations, and a cheerful ambiance, but fail to supply the utensils for the ensuing feast. Testimonials of Mary Kay beauty consultants and $1,000-a-week magazine editors who work out of their homes are very encouraging. But herein lies the danger: the tales are all by people who have survived to tell them.
John J. Gargan's Milking Your Business for All It's Worth (Prentice-Hall, $16.95), by contrast, is a bit pessimistic and paternalistic: full of the wisdom of hard-won experience, but presented in a way that makes it difficult to take. You would do well to swallow these bitter pills, however, if you are concerned about passing along the fruits of your labors to deserving employes and heirs. The book is about hanging on to money agreesthat would otherwise go to the government. Its secrets are to choose the right business format, to take advantage of tax-sheltered benefit plans, and to prepare from the start for the eventual disposition of your business.
Gargan's prescription is to incorporate at the first sign of profit. He says that most of the 7 million sole proprietors and the one million partnerships in this country would be better off incorporated. (He may be relieved to note that a breakdown of the SBA's 1981 new business statistics shows that 580,600 were new incorporations.)
The small businessman ultimately survives due to an ability to suspend, or even abandon, his own firmly held ideas in favor of another upon which events have conferred an advantage. Natural selection is madly at work in the marketplace; more so when the economic climate turns bad. The businessman, like the airline pilot who is able to disregard the urgings of his inner ear in favor of the more reliable readings of his instruments, must recognize the warning signals and act fast. Like the theoretical scientist--the Copernicus of the cash register--he must also dare to contradict the considerable pressure of conventional wisdom. In this manner, the small businessman may make a good deal of money or he may lose it; but rarely does he maximize profits or cut losses in the way that a big company does.
For most people, the definition of success is pretty clear. It has to do with making money and acquiring material things. On the surface, the books reviewed here tend to reinforce that notion. They all dutifully state that success in business does, after all, mean making a profit. But the self-employed person is uniquely in a position to define success however he pleases. Read between the lines. See if you don't find the happily self-employed among these authors each getting his kicks from something other than his company's Profitability Index.