So you have decided to start and run your own business, but have you given any thought as to the lifestyle you want to have? Depending upon what type of business you choose to launch and how you decide to manage its operations, it could either fit seamlessly into your lifestyle goals or cause you endless heartburn. For example, depending upon your personality, goals, aspirations, and expectations, opening and running a cozy neighborhood coffee shop could either be a little slice of heaven or a heaping plate of hell.
There are two main questions you should be able to answer before you jump down the rabbit hole: 1) where are you (and your partners) currently at? and 2) what do you (and your partners) want? Simple right? But, like most things in life, these two questions will almost always lead to other more complicated, open ended questions. Listed below each question are some, but by no means an exhaustive list, of subjects that your answers to each of the questions should address.
– Skills and Experience
– Contractual or Legal Obligations
– Income Expectations
– Exit Strategy
– The amount of time and effort the successful venture will require from you
– Business portability
– Social prestige
– Public exposure
– Active or passive ownership
Skills and Experience: What skills do you have that can be leverage in your entrepreneurial venture? What level of work experience are you bringing to the venture? Do you have good interpersonal skills? Can you sell people on products and ideas? Do you have a high level of training in a particular field? Can you speak another language?
Assets: How much liquid cash do you have in your checking or savings accounts? Do you have any stock or securities that can be easily accessed (not in an IRA)? How much are your illiquid assets (house, car, boat) worth?
Liabilities/Debt: How much unsecured (credit card) debt do you have? Do you have a mortgage on property you own? If so, how much is your mortgage? Do you owe money on any of your personal property (cars, boats, furniture…)?
Education/Credentials: What formal education do you have? Do you have any particular graduate-level credentials (MA, PhD, JD, MBA, MD, CPA…) that may enhance your credibility in your future business venture? Do you have specialized training in a trade or profession that requires licensing (electrician, cosmetology, registered nurse…).
Credit: What is your credit score? Do you have any negative marks on your credit reports? Do you owe any creditors? If so, how much do you owe? Do you have any mistakes on your credit report? What is your current capacity to borrow?
Contractual or Legal Obligations: Are you subject to any non-compete agreements from former employers that may affect your ability to conduct business in your future venture’s industry? Are you subject to any non-disclosure agreements with former employers (or other entities) that may impact your ability to pursue you future venture? Are you obligated by a court to pay child support or alimony?
Income Expectations – Do Your Wage Expectations Align with Your Entrepreneurial Reality?
How much money do you want to make? The obvious answer is as much as you can. But aside from swinging for the fences, you should have both a targeted midrange salary expectation and an absolute minimum salary requirement for both the startup phase of the business and for when the venture (hopefully) becomes profitable. The targeted midrange salary is what you expect your business to pay you if everything goes as expected. The absolute minimum salary requirement is for when things awry and belts need to be tightened. The absolute minimum salary is the last notch on your belt – you won’t go any further. See the example is below:
|Startup Phase – Before Business Profitability||Growth or Maturity Phase – After Business Profitability|
|Target Midrange Salary||$400,000||$700,000|
|Minimum Acceptable Salary||$250,000||$400,000|
The goal of this exercise is to align your expectations with both the reality of your business idea and the limited resources you have to attain your business goals. You may be enamored with the idea of becoming your own boss and a fabulously successful business owner, but no one, not even a superhero entrepreneur, can ignore the necessity of eating on a regular basis. Your startup phase wages must be factored into your startup costs and your pro forma projections must support your “after profitability” assumptions and needs. If you can’t honestly justify, with hard numbers, how your business will provide you with compensation that roughly matches your expectations, then you will need to 1) lower your expectations, 2) overhaul your business idea, 3) or simply walk away.
Exit Strategy – How do you want to leave your business?
Before you even start your business, you should think about how, when and if you want to eventually get out of it. This brings up a host of thorny, open ended questions that you need to put a lot of thought into answering. These questions may not have to be answered right away, but it is important that you at least consider them as you move forward with creating your entrepreneurial venture.
Do you have a time horizon for how long you want to own or actively manage the business?
If a co-owner of the business, do you plan on selling your interest in the business to another co-owner at some point in the future? Do you have some formal agreement with your co-owners as to how this will proceed?
Do you envision selling the business to a third party? If so, how essential are you or your co-owners going to be to the businesses day-to-day operations? If you or your co-owners are irreplaceable or essential to the business’s profitability, you may have a very difficult time selling that business to a third party.
Do you plan on eventually selling or transitioning the business to you children or family members?
Do you envision that, when you eventually want to exit the business, your exit strategy will be to simply shut it down and sell off its assets?
Effort Required – How Much and How Hard do You Want to Work?
It sounds like a stupid question, except it isn’t. Starting and running a business is often an adventure – a 24/7 adventure. Some businesses are high maintenance and all consuming. For example, take a high powered trial attorney who owns her own law practice. The attorney is often not able to exert much control over her work schedule. She must always respond to someone else’s agenda. For example, often she cannot control the timing of court appearances or the deadlines for motions and briefs. Sixty to 70 hour weeks are common. Above all else, she must subordinate her time and energy to accommodate the needs of her clients. Owning and maintaining this type of law practice (and this applies to many industries within the professional services sector) will drastically curb your ability to spend time with your family and friends.
So, how much time and energy are you willing to dedicate into making your future business a success? “As much as it takes!” is a stupid answer. You must be able to have some rough idea about how hard and for how long you are willing to work in your entrepreneurial endeavor. Another more practical way to think of it is this: how much undivided time and attention, at a minimum, are you willing to dedicate to your family and friends (outside of your business activities)? Is being able to leave work for an afternoon to watch your kids play soccer a big priority for you? Is having a business that affords you the scheduling flexibility to take care of your ailing parents a priority for you? There is no right or wrong answer to any of these questions and the answers are different for every entrepreneur.
Furthermore, do you want to combine business and family (or friends)? This can often be a very thorny thicket to navigate, even for the best of friends and businesspeople. Hiring or partnering with relatives can either strengthen your business or (more often than not) doom it.
Business Portability – Is being able to Run or Manage Your Business from Anywhere Important to You?
How portable is your business? Do you want a business that can be run over the internet from anywhere on the globe, or is this a low priority for you? Most businesses must be operated or managed within fairly distinct geographical limitations. It is pretty difficult to actively run a sports bar in Topeka, Kansas while living full time on a beach in Thailand. But many professional services businesses, that are information and analysis intensive (accounting, web design, computer programming), can be conducted remotely. Using computers, communication devices and the internet, entrepreneurs can make almost anywhere on the planet their office. But the ability to run your business from anywhere may not be a priority for you. Many entrepreneurs need, and welcome, the structure of showing up to an office or place of business every day and would not be productive either working from home (or swinging in a hammock on a Hawaiian beach).
Also, how portable are you? Will your business require you to travel a lot and spend long periods of time away from home? While owning a business that requires a lot of travel (I’m thinking consultants or specialized services) may be fun and exciting when you are young and unattached, it can quickly turn into an unwelcome chore when you become married and have small children. Your circumstances in life can turn on a dime. At least make sure you consider that when starting your own business.
Social Prestige – Is it Important that Your Business Makes You Look Cool?
Does the social prestige from your business matter to you? Prestige is one reason, among many, of why some entrepreneurs start businesses. They want to be perceived by people they know or don’t know in a certain way. These entrepreneurs use the businesses they create not only as a means of financial support, but also as an opportunity to create their own reality. Some professional service businesses convey social stature and prestige (such as law firms, doctor’s practices or investment banking). This could put you in a very different social circle than owning a strip club or a cleaning service. An entrepreneur must not only figure out how he wants to be perceived by the public through his business activities, but how important that public perception is to him personally.
Public Exposure – Do You want to be a Public Person or Protect Your Privacy?
Also, an entrepreneur must figure out just how much public notoriety he or she is comfortable with. For some businesses, such as owning a moving company or software development business, public notoriety will not present itself as much of an issue. A few people may know who you are and what business you own, but let’s face it, a guy who owns a small accounting firm is not going to be a celebrity on the level of Bono or Lady Gaga. But you may be regularly scrutinized by your community if you, as an entrepreneur, are integral to your business’s brand. Examples are day cares, law practices, or public relations firms. Especially in the age of social media, the line between an entrepreneur’s business and personal life can blur. It could potentially harm your business if you are portrayed in either the mainstream or social media in a way that is inconsistent with your business’s brand. On the other hand, your business brand may thrive off of controversy. If your business is party planning, a band or a DJ service, then being famous – even a little infamous – is probably necessary and desirable.
Active and Passive Ownership – How Active do You Want to be in the Day-to-Day Management of Your Business?
It’s important to define the nature of your involvement, in both depth and scope, in the business you are founding. An entrepreneur’s involvement in his own business can range from being a full-time manager/employee (active ownership) to that of a hands-off investor (passive ownership).
An active owner materially participates in the day-to-day activities of the business. Most business owners and entrepreneurs actively participate in their businesses in some way, shape or form. Many work full-time in their businesses as employee/managers, drawing both a paycheck and profits (if there are any).
The definition of a passive owner is a little trickier to nail down. A passive business owner does not participate in the day-to-day activities of the business he or she owns. The IRS states that passive income can only come from two possible sources: rental activities or “trade or business activities in which you do not materially participate.” Within the context of entrepreneurial endeavors some examples of passive income are:
Receiving passive income is delightful. The hard part is usually accumulating enough assets or creating a business system that can produce passive income (either through rents or business activities). Examples where an entrepreneur can derive passive income from her investments are:
Most entrepreneurs who start businesses have one of three basic plans for their involvement in their enterprises.
1. From the businesses inception, the entrepreneur will be a passive owner in his or her business. They will not work in or materially participate in the day-to-day management of the enterprise.
2. The entrepreneur(s) are essentially creating a job for themselves. They plan on working in the enterprise as an open-ended, long-term commitment.
3. The entrepreneur(s) plan to be heavily involved in the business’s startup and operations over a period of a couple of years. Then, at some undetermined point in the future, they plan to hire a manager and run the company as a passive or semi-passive investment.
Regardless of where an entrepreneur sits in the business lifecycle, s/he should decide which direction the company can point from the outset. This will help define the long-term vision and how the company can see itself progressing long into the future. What would you include in your first personal and business audit?