Starting A Business Is Not For The Faint of Heart

Starting a business may be your “American Dream,” but it is not for the faint of heart. Sometimes the best decision about starting a new business is not to start one at all. 

Consider these sobering statistics. Over 600,000 companies with at least one hired employee are started every year, according to the Small Business Administration. Of these businesses, two out of three stay alive for at least two years but only four in ten last at least six years.  

Despite these odds, there’s always a fresh pool of entrepreneurs-to-be and they come from all walks of life: young professionals with a hot technology idea, middle-aged executives tired of the corporate grind, retirees bored with retirement. Commonly, their approach is, I’ve got a great idea for a business, now how do I get the money to start it? 

Stop right there.  Financial Planners often say that the first question should not be, how to get the money but whether to start a business at all. In a recent article from the Journal of Financial Planning, a planner said she’s talked more clients out of starting a business than she’s talked into starting one.  

One of the first key factors that should be addressed well before the question of financing, suggest planners, is time. Budding entrepreneurs typically do not realize the huge time commitment it often takes to launch a new business. It means trying to balance your family life, your personal life and possibly your current job. According to the Global Entrepreneurship Monitor, two-thirds of the new-business owners hold full or part-time jobs during startup. [WSJ article] For most of them, their business will remain a sideline. That’s a lot of juggling of time. 

Are you willing to commit the necessary time and energy? Equally important, is your family aware of and comfortable with the time commitment? Planners say executives and retirees often bow out when they realize how much time a new business will really take. 

Another key early question is whether this proposed business will fit your overall family and financial goals. What if you have children nearing college age? Will starting a business divert money from their college fund? What critical family benefits such as health insurance might you lose or have difficulty replacing if you give up your current job for your own business?

Retirement is often another competing issue. It’s common for mid-career workers to start a business not only to provide current income but with the idea of selling it down the road to pay for their retirement. But that’s potentially riding much of their nest egg on a single investment. Worse, entrepreneurs often tap their nest egg to fund their fledgling business, thus putting their retirement funds further at risk. Would there be better alternatives to building that nest egg than starting a business? 

How do you determine whether it is financially and emotionally worthwhile to commit the time and energy to actually start a business? While some successful businesses are started on a napkin over drinks, most experts recommend preparing a formal business plan—a structural blueprint documenting the factors for the business’s success. Entrepreneurs often view business plans as the document necessary for convincing lenders or investors to provide start-up financing. Getting adequate financing is certainly a critical step to making a business successful. Undercapitalization of startups is often cited as a major cause of failure. Yet a formal business plan serves an earlier and larger purpose: clarifying the soundness of the idea and determining whether one can really make money at the endeavor.  

One of the financial planners interviewed in the Journal of Financial Planning article said that several years ago he was thinking of starting his own rental equipment company. But upon preparing a formal business plan, he realized he wouldn’t turn a profit for at least five years, so he dropped the idea. Another planner did a break-even analysis for a client wanting to start an electrolysis school and discovered that the school would need 100 percent enrollment to survive. 

Thus, before racing out to secure financing, choosing a business form and so on, carefully analyze whether the business is really worth starting in light of the time commitment and financial risk. The nearest U.S. Small Business Administration office can be a good place for startup help, as well as your financial planner.

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Last modified: January 23, 2007