- Chapter 30 -
BECOMING AN ENTREPRENEUR
began my business career at the age of seven dragging a bag of Saturday Evening Posts around, ringing doorbells and making 1-1/2 cents for every sale. I have only worked for someone else as an office boy for $30 a month in 1935 and as a 1st Lieutenant Platoon Leader in Patton's Army, and neither of those are occupations to which I would like to return. After World War II I started my own business, followed by a succession of others, with the result that I have been a typical entrepreneur for well over 50 years.
As I learned from my successes and failures - and the failures were more educational than the successes - I began to share my experiences with others and have continued to do so in classes, lectures, and, more importantly, in counseling many individuals. As a result I have extracted some principles which I hope you will find helpful.
Who should be an entrepreneur?
- Do you have a good measure of self confidence?
- Do you get a sense of pleasure out of conceiving an idea and the excitement of carrying it to fruition?
- Are you persistent, willing to struggle though problems without getting discouraged?
- Are you good at dealing with people on all levels, bankers, investors, complaining customers, and employees?
- Are you willing to work long hours on a crucial project and even enjoy the work?
- Can you carry the burden and even relish the full responsibility of a business which is vital to your future?
- Did you sell lemonade on the street corner as a child or engage in some business activity at an early age?
The characteristics implied in these questions are ones which are most frequently attributed to successful entrepreneurs, and there is some merit in considering whether or not you have the temperament for this type of activity. However, because you can not answer some or even most of the above questions in the affirmative does not rule you out.
For example, a large number of successful entrepreneurs never thought of becoming one and indeed were probably averse to the idea. These were individuals who lost their jobs as corporations "down-sized" and, unable to find comparable employment or any employment at all, they started their own businesses by default. Usually these were in fields closely allied to what they had been doing, and, in many cases, they offered services to former employers who found it more efficient to hire outside assistance than to have a department of their own. This chain of events has made some happy individuals with their own businesses.
Many businesses are started by individuals who purposely break with their former employers and set themselves up in competition or in an allied field. A successful candy distributor said, "You spend your business life training your competition."
Who should not be an entrepreneur?
Just the desire to make lot of money, having heard that many entrepreneurs have, is not a basis for starting your own business. There is a lot more to being successful than that - long hours, persistence, commitment, etc. Entrepreneurs enjoy what they are doing. One of them said it was so much fun he would do it just for points, like in a bridge game. Money was a minor part.
If you have some overriding hobby that fills your leisure hours, your week ends, don't try being in business for yourself. It takes long hours of work, But for a true entrepreneur it isn't really "work" in the usual sense. He would rather spend his Saturday afternoon, would find it more exciting, installing a new piece of machinery which would reduce his production costs than he would hang gliding. However, it should be added that some people are able to convert their hobbies into businesses.
How do you find those deals?
This is probably the question that people most frequently asked me. And it is an important one, because you can have all the temperament qualities of an entrepreneur, and the desire, but they won't help without a sound idea, well researched. Some people have a knack for discerning opportunities in ordinary events. But there are things you can do.
Attend lectures. Read books. Plow through magazines. Observe what other people are doing. And talk to others who are involved in similar ventures. Many are the occasions when I have sat down with a fellow entrepreneur to see how we might stimulate ideas. "Here's what I am doing, what are you doing?" Obviously you are not going to give away your own secrets which might be copied, but you can learn a new way of financing, or about a business which has been successful in other cities while offering some ideas of your own.
An example of finding an opportunity in an unexpected ordinary event took place early in my career when I was owner of a confectionery manufacturing business. I took a gorgeous blonde on a picnic at Fontainbleau State Park. It was love at first sight, not with the blonde because I had known her for some time, but with a Giant Lollipop I saw on sale. It occurred to me that we could manufacture this item. But first we needed a new expensive, too expensive for me, piece of equipment. I learned about a crude but workable second hand unit across the state and purchased it for $25. We subsequently sold tons and tons of Giant Lollipops to F. W. Woolworth and to other customers.
When I sold my confectionery manufacturing business I received a good price but it was not enough to take care of five upcoming college tuitions. I found myself one of those unhappy people, in the ranks of the unemployed.
A slick life insurance salesman came in to see me, and I was in the mood to hear any presentation. He had read a book called How to Make One Million Dollars in Real Estate (available from Amazon.com or Barnes & Noble) and had accumulated 9 million dollars worth of property with hardly any investment of his own. This piqued my curiosity. He then asked to borrow $10,000 dollars to buy a show horse for his daughter. I asked him why he thought of me, and he said he had heard that I had bought a horse for my daughter. Little did he know the modest cost of my daughter's horse. Needless to say I did not lend the money, but I did race out and buy the book.
The insurance salesman had indeed accumulated millions of dollars of real estate, but he had overfinanced and mismanaged his affairs, draining too much from the properties for his personal use. So his little empire folded. I purchased one of these properties, the 42 unit Maison Lafitte Apartments, for a very good price at the bankruptcy sale. Learning from my first apartment, I found I could buy others and set up a series of limited partnerships with investors. All of this resulted from the fact that a man wanted to buy a horse for his daughter.
I did not know when I married that pretty girl from New Mexico that she would be teaching me some things about the oil business which she learned from her father. I built on this and started limited partnerships drilling oil wells. Who would have expected that?
Several times I put lecture series together at which the outstanding entrepreneurs of our city spoke. They were glad to share their experiences. Jim Bob Moffett, Chairman of Freeport McMoRan, told about the value still to be found in old oil fields offshore Louisiana. One member of the audience heard it but did not attach any significance to it until he learned of such an opportunity. He would not have known it was an opportunity had he not heard the explanation in the lecture. For some time it has been his major source of income and will be for years to come.
You might reply, "Nothing like that ever happens to me." Are you sure? There are opportunities all around. They just have to be identified.
Don't fall in love with your deal
Some people are so enamored of their new business ideas that they do not make the proper analyses. They fall in love with a project, and love is blind. They either don't know how, are too lazy, or perhaps they don't want to investigate too closely for fear they will find something wrong. But that is exactly what they should be doing. It is better to find the stop signal before investments are made. There is no shame in saying, "It was a good idea but I have found reasons why it won't work." Too often the old refrain, "It can't miss." leads to disaster.
This is particularly apt to happen with regard to real estate. A person finds a piece of property with plans to build, or a renovation project, and the first logical step seems to be to hire an architect, who is delighted to make drawings and plans. A friend of mine spent $75,000 on architectural plans, and found the zoning would not permit his project.
Over 22 years I taught "The Economics of Real Estate" to architects at Tulane University. I pointed out that sometimes their aesthetic ideas conflicted with the reality of economics. They talked about "airy spaces", and I suggested that airy spaces don't bring in rent. There is no use designing a building that is too expensive for the client or which can't be rented for enough to justify construction. The challenge is to combine aesthetics with economic reality.
Here's typical interchange with my students.
"What do you think of the architecture of that apartment house, Mr. Bell?"
"What's the occupancy?"
"I love the architecture."
Or on the occasion when a real estate broker would describe how beautiful a building was and asked me to go look at it, my response was, "I don't want to look at it. I might like it too much. Show me the numbers."
It isn't that I don't appreciate architecture. My 1850 home was pictured in the World Book Encyclopedia because of its architecture.
There are economic restraints if it is an economic venture.
It is wise to make a list of what might stop the project. Consider them one by one, starting with the easiest and cheapest to investigate. Zoning is a prime example of an easy one. The most important is cost and whether or not the project will work from the viewpoint of economics. This requires considerable investigation. Remember it is lot cheaper to operate an adding machine than to find out the deal won't work after purchases of supplies, land, or whatever investments of this nature one may think are required.
Even with the best of planning, almost every long term successful entrepreneur runs into snafus beyond his control. Some of my failures caused considerable laughter in my class. One such was our effort to develop a fast food franchise named after a famous athletic hero, who had a whole movie made of his life. We opened our first store with great hoopla, and our hero was there. Almost immediately afterwards he was accused of rather startling improper financial dealings which resulted in considerable national publicity. The value of the name was lost. We were put out of business. The loss was substantial, but it was shared by a number of people.
The challenge is to have more successes or even one spectacular success to overcome any losses from failure which I fortunately did. Also, I limited my exposure in any one deal to a conservative amount.
Do your research
Pursue every conceivable avenue of investigation to learn of the prospects for your venture. Visit your competitors' stores, talk to people in similar businesses, get books from the library. Search the Internet. If there is a professional society in your field, consider joining and attending a convention where you can make friends and ask questions. Visit another city, and talk to someone in your field who might give you information because you won't be competing with him. Go to the library and search for professional journals in your field. Read the articles and look for ways in which you might get information. Do everything possible to be knowledgeable before you plunge in. You can't be shy or lazy when you have so much at stake. (See Chapter 4, Asking for Advice.)
Here is a suggestion which may surprise you. Call on your competitors! Your response might be, "Why should they help me?" Let me give you an example. Early in my career, with my confectionery manufacturing business, I was offered a deal with Marx's Department Store to operate a home-made candy counter with a five year contract. I called on Mr. Torrance (not his real name) at White's Department Store who operated a similar counter to ask for advice. He turned out to be one of the most arrogant, insulting, down-right nasty individuals I have ever met. But he gave me some of the best advice of my career, "Don't do it." And fortunately I didn't.
His motivation was not to help me but to eliminate competition for himself. However, he accurately pointed out that Marx's didn't have the traffic needed to make it a success; and, furthermore, its customers were of a lower economic bracket, not good prospects for expensive home-made items. Subsequently, I realized how right he was. We would have been under contract for five years in a losing enterprise.
Don't believe what people tell you. Check them out. Here is an example. If you are buying an apartment house you can believe the monthly mortgage payment which is easily checked. But do not believe the stated occupancy. Count the cars in the parking lot at 2:00 AM and divide by 1½, usually about the number of cars per apartment. Check the names on mail boxes, although these can be forged. Walk by all the apartments and see how many might have the curtains open and are empty. Make friends with the maintenance man. He will tell you all sorts of things. Go spend the day washing your clothes in the washateria room and talk to the women who come in. One of my daughters did this for me at an apartment in Vicksburg, Mississippi. She gathered information which caused her to advise me not to buy the apartment.
And she was right!!
Check out individuals with whom you might have a close association, especially a partner. A friend of mine had a partner in the silk screen business and found he was augmenting his income by cracking safes at night. I was considering an association with a man, but, having some reservations, I got a private investigator to check his past in St. Louis. I received pages of court documents showing unpaid bills and bad debts.
Above all, don't be so eager to get your great deal started that you get stampeded into premature action, especially if you are being told if you don't act by a certain date you will lose this important opportunity. My father told me that as a general principle if a used car salesman tells me if I don't get the car by tomorrow, it will be gone, don't do it. Go back three days later. The car will still be there. Offer him less.
An amazing number of people who have come to see me about their business ideas have felt that all the research they have to do is to follow a simple mathematical formula: "If 10% of the people in our town buy our product - or come to our restaurant - or use or service - whatever the project is - we would have a booming business. Let's cut that down to 5%. We would still do well. Let's be conservative and make it 2%, our business would still be very good. Lets be real conservative and make it 1%. We would still succeed."
Who says 1% are going to be your customers? People buy because they get a better product at a lower price, not because they are required to fit a statistical prediction.
More sophisticated readers will think this is ridiculous, but based on my experience, there are some people reading this words who have done just that.
Write a business plan
Closely associated with doing your research is the absolute necessity of writing a business plan. Any investor, any banker, any prospective partner wants to know every detail, the answers to a host of questions: What is the business? What is the plan of operation? What is the competition? Who are the principals? Who will operate the business? What is the budget for capital equipment and is this backed up by quotations? What is the budget for operations? What are the various kinds of insurance needed and the cost? On and on.
To go into depth in business plans is beyond the scope of what is being written here. It can take a whole book. Fortunately, for aspiring entrepreneurs there are a host of books and computer software programs which will take a person step by step through the process.
I strongly suggest you get the books and programs for developing your business plan. Jazz it up if possible, with pictures if available. Fortunately, when I made brochures for investors for apartments there was plenty of opportunity for colored pictures.
There are other advantages to a business plan other than showing it to bankers and investors. The act of preparing it is educational and will give you a jump start when you go into operation.
Financing your Deal
One of the most common methods of financing a new venture is by using credit cards. It is also the most risky, and one which I do not advise. A frightening statistic is that a quarter of bankruptcies result from a failed entrepreneurial enterprises. You may read that bankruptcies aren't very harmful these days, but they can affect the future and reputation of an aspiring business person.
However, it must be said that it has worked for some people. A woman, who has become a very good friend of mine, found that banks are slow to lend to lone, divorced women with children. She felt that credit cards were her only alternative to nourish her business which was doing reasonably well. She got as many as she could, worked them to the limit and skillfully made partial payments just before being pounced upon. It was successful although nerve wracking.
Then she married her competitor. They merged their lives and their businesses, and, after a period of time, sold the latter for "several million dollars". I can attest it is a very happy marriage, not relating to finances but because they are two wonderful compatible people. This ending of the story is hardly an example others might follow, but she did use credit cards effectively.
Another common way of raising money also has some dangers. That is borrowing from relatives or inviting them to be investors. Now, it is true there are generous relatives. An uncle gave me $3,500 to start my business career, no strings attached. More often repayment is expected, or profits on a deal. However, if things don't go well there can be real problems, and relationships are more important than money. Entrepreneurs learn that you can know certain people all your life and not know how they will react when their money is concerned. When the repayment schedule falls behind, or returns on investment aren't as predicted, there is that frequent response, "But you said......."
This is only pointed out as a caution. You can judge your own situation best. Many family investments do well. My wife, Rubie, has a peculiar intuition as to which of my investments will be successful.
Also a surprising number of people suggest a plan whereby after the business is doing well they will buy out the investors. In other words, the investors take the risk and they end up with the business and reap the profit. (This literally happened last week.) Two different people, after proposing this plan, asked me for some names of people they could call on to get investors.
Many times aspiring entrepreneurs who have come to consult with me say, after the briefest of explanations about the business, "I want 51% of the stock, and I will give 49% to an investor who will put up all the money." (Note the word "give".) Someone has told them they should have 51% of the stock.
My response is that it would have great advantages to owning 51% of the stock. You could elect a majority of the Board of Directors, all friends of yours who would vote you a fat salary, and you could put your relatives on the payroll. There are other steps you could take so that the investors will be financing the company for nothing.
They look at me in horror and say, "Oh, I wouldn't do that."
"Maybe your wouldn't, but no sophisticated investor is going to expose himself to that."
One plan which has worked is for the investors to start with 75% or 80% of the ownership, with the organizer owning the rest. Then after a period of time he will have an option to buy up to 50%. This is appealing to the investors as they know the operator will work hard to make the business successful and give value to his ownership.
It is disconcerting to many beginners to learn the power and control of the investors which they feel is necessary to make their investment worthwhile. No matter how well they choose them, some of their ventures fail and they have to make enough from the successful ones to make up for it. There are far more deals out there than there is money to support them.
I asked a very successful entrepreneur recently how to raise money for deals, He replied, "Find someone who believes in you." This is obviously based on character and previous performance, and again emphasizes a well though out concept and a complete business plan. For some there comes the happy day when, based on previous performance, people will invest in the entrepreneur, just on his say-so.
Let's make it work
I have a little speech given in the past when I consulted with people, "Let's take the view we are going to make it work. If we find problems it is best to identify them in order to overcome the difficulties." If there seem to be a number of negative aspects to starting a business which appear above and below, it is only to point out the pitfalls to be circumvented. If I have found someone is really on the wrong track I have a storehouse of examples to cite in which a person did a similar thing and what happened, a much procedure than what can appear as criticism. Quite frequently I can summon up some mistake of mine in a humorous way which is comforting to the listener.
There are more opportunities for new business endeavors now than ever before, and more money to support them. Entrepreneurs are considered to be heroes. When big corporations were down-sizing, the slack was more than taken up by business for 100 employees or less. As you probably have guessed, I have found it an exciting life, and if entrepreneurship is for you, I wish you the same.
Tips, cautions, and information
- Don't invest all your assets in one deal. No matter how good it sounds, there are enough unexpected and uncontrollable events to make it unwise.
- Get a good lawyer and a good accountant. Don't call on your fraternity brother who has just graduated from law school and doesn't charge much. Too much is at stake.
- Don't put a friendly lawyer and a friendly accountant on your board thinking that you might get special service and even free service. When tax time comes, the good paying clients get the service. It's human nature.
- Whether you realize it or not if you go into business you are operating under a legal structure. If you own the business yourself, it is an Individual Proprietorship. If you are operating with a couple of other people, it is an Ordinary Partnership. The investors get tax benefits and limited liability in a Limited Partnership, but the General Partner has all the liability. A Corporation has officers, a board of directors, and stockholders. A relatively recent legal entity which is being used more and more by entrepreneurs is the Limited Liability Company, which has a Manager, not a President. It has some of the advantage of a corporation and some of the advantages of a partnership. This is the briefest of descriptions, so don't make any decisions based on it. Always, always consult your lawyer. However, this may give you something to think about and to inquire about.
- Give a great deal of consideration about going into partnership with other people. The failure rate of partnerships is very high. Sometimes it is because of poor planning, or lack of capital, but most often it is because the partners can not get along. When there is a clear division of duties with skills to match assignments, as would be the case if an engineer handles manufacturing and someone experienced in sales takes care of marketing, agreement is more likely. But when partners, even very good friends, of similar interests and talents try to make decision on the same matters, problems frequently arise, especially in times of trouble when emotions enter the picture. "Oh, we won't have problems. We've been friends all our lives." This is not necessarily so. (This same description appears at the end of Chapter 20, quite understandably called "Settling Disputes".)
- If you have a corporation, be sure to keep the corporate books properly with scheduled board of directors meetings and stockholders meetings, with minutes of each. So frequently the organizers and operators get so busy trying to develop their business, thinking that it is only a "pocket corporation", and then the day comes when those records are absolutely necessary, for example if you want to sell the business. It can be too late to reconstruct what should have been done.
- Make a monthly profit and loss statement. Again, the entrepreneur is so busy promoting he doesn't take time for the proper bookkeeping and he may wake up and find he is in real trouble which might have been headed off.
- Read Chapters 22 and 23 in Lessons in Lifemanship on hiring employees.