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Being in business for yourself has great risks, rewardsThe great American Dream: Being in business for yourself.  Is it a dream, or is it a nightmare?

Over the last 30 years I have consulted with hundreds of business owners about either buying or starting their own business and selling or unloading the business they are already in.  There are numerous considerations that need to be addressed when considering either purchasing an existing business or venturing out on your own and starting a new business from scratch.

Let’s begin with the perceptions that go along with the desire to start or purchase a business:

By having my own business, I will have the ability to create wealth for myself and do it on my terms.

As a business owner, I will have more flexibility in my schedule and have the ability to work as much or little as I desire.

By owning a business I can make decisions instantly rather than dealing with all the administrative hang-ups that exist when you are involved with a company as an employee or partner.

Now let’s address the perceptions of the American Dream, what is real and what is fiction:

It is absolutely true that by having your own business you will have the ability to create wealth and at a much quicker pace than that of being an employee or a partner in a company where you are not in control.  However, along with ownership comes an understanding that there is risk, often extreme, when either purchasing an existing business or starting a business from scratch. What is your risk tolerance?  Do you have the stomach to be able to accept the bad with the good?  Do you realize that a significant number of small businesses fail, often due to situations that are out of your control, like the current recession?  Do you have enough capital to get you through extended periods of tough times and downturns in the economy?

Believing that you will have more flexibility in your life is a double-edged sword. Depending on the type of business endeavor that you choose to embark upon, there will definitely be choices as to how many hours you work and when you choose to work them. That being said, owning a business is often a 24/7 type of proposition. It is my view that it takes a driven person to be a business owner –you need to eat, sleep and drink it for many years if success is going to happen. Flexibility means you get to work as much as you want, not as little as you want. What differentiates the business owner from the employee is that there is no “cap” on how much you can work.  There is no such thing as a “40-hour work week” for a business owner. As an owner of a business, you may think you are working Mondays through Fridays, 8-5, but the reality is that you are taking home projects at night, working on community service commitments on an ongoing basis as part of your marketing program and having a huge responsibility toward keeping your employees happy and productive. Is this what you consider “having more flexibility”?

The trade off of having to deal with administrative hang-ups versus being able to pull the trigger without having to consult with anyone has always been an intriguing issue to me. I am a decision maker, hate procrastination and just want to get things done.  However, I am also subject to “knee-jerk reactions” that can backfire on me.  As an employee, there are typically more checks and balances that can cause frustrating delays. But these delays will often lead to a better overall result for the process being analyzed.

After reading the above comments, many of you are asking yourself “Who would ever want to own their own business?” The point that I am trying to make, however, is that it takes a special personality to be a business owner, a courageous person who can analyze and accept risk and then be willing to live with the results. I have a few tips for helping to make the American dream a reality:

Make sure that you have an understanding of the industry that you are choosing to go into and that your research brings you to the conclusion of an acceptable “risk/reward ratio.”

Being overly leveraged is the death of small business. Before acquiring the business analyze what your working capital needs are and make sure that you have banked a reserve that will get you through a few rough bumps in the road.

Before pulling the trigger on a business acquisition or startup, consult with both your financial adviser and banker to make sure the deal makes sense to them.

In regards to the above comment, the “proof in the pudding” will be that the banker not only likes the deal but will be willing to put “skin in the game” in the form of equipment financing and a line of credit.

Last but definitely not least, understand your lease obligations and when you need a long-term lease versus a short-term lease. My view has always been that on a business startup, the shorter the lease, the better.  If the business fails, this will enable you to cut your losses. If you are acquiring a mature business, you may want a long-term lease. This is because part of what you are acquiring is a location.

Hopefully the above recommendations will be a good starting point when making the right decision regarding business opportunities.  Just try to make the “American Dream” a dream come true and not a nightmare.

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Jim Andersen, CPA/ABV/CFF/ASA and founding partner of Andersen & Company, is now a partner in the consulting-business valuation and litigation practices of Burr Pilger Mayer (BPM) in Santa Rosa.   For more than 20 years, Jim has been taking North Bay businesses through the business valuation and succession planning process.   You can reach him at 707- 524-6530 or via e-mail at jandersen@bpmcpa.com.