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I. Finding the Yellow Brick Road

Congratulations, you have the right stuff to succeed as a business owner! Where do you go from here?

Many people, at this point, become overwhelmed by the freedom they have so aggressively pursued. You could return to whatever career path you were following before you subjected yourself to the endless questionnaires, pricey seminars and books on starting you own business. Ending your quest as an entrepreneur here may leave you with an interesting story to tell of how you would have, could have and should have started this or that business. This may be enough for some people, but not for you because you have the right stuff! How should you approach entrepreneurship?

First, you should not place yourself under undue time pressure to select the business that you will own. The textbooks would have you think that all you have to do is sit at your desk filling out a few planning templates and in a few hours of ticking and checking boxes out pops the next General Motors Corporation. This is not true. So pitch the time clocks for now because the race has not started.

The second rule of finding the yellow brick road to your own business is to be realistic. With a few exceptions, the business that is right for your talents, skills, education, interests (hobbies), financial situation and personality is most likely an extension of what you are already doing. It is closer than you think. If you are not sure that your plan is realistic, perform this test. Ask a close friend for money. You will quickly know whether your chosen business is realistic for you by his or her reaction. Unfortunately, realism is always measured subjectively in degrees. For instance, a person with a doctorate in the sciences in likely to find it difficult to obtain financing even from a friend to start a fast food restaurant. All things being equal, the same person would find it substantially easier to obtain financing for a firm developing software for the Internet. Most people would conclude that this business choice would use computer and other skills that accompanied, but were not necessarily integral, to his or her position.

I see many well-written business plans that make me wonder what the entrepreneur was thinking when they have no relevant background or interests to the business they want to start. Only in 'OZ' do broomsticks fly. In reality, every business is a horse and jockey situation. The business is the horse and you are the jockey. You would not bet on a race horse that had a four hundred pound gorilla as the jockey. So why do you expect people to get excited about a school teacher, with no relevant background, who wants to develop strip shopping malls or a scientist who wants to flip burgers? Maybe this is narrow thinking, but it is how the world works. There is enough risk in starting a business without adding unnecessarily to the learning curve. Above all, be realistic in your selection of a business.

Third, is there a real need and demand for the business activity that you are contemplating. Only in the movies is there always room for one more. This is one of the hardest parts of selecting a business. You believe your selected endeavor is a sure thing, but does anyone else? Will people beat a path to your door or will spiders weave their webs over the entrance to your business?

Just ask a marketing executive that handles new product introduction and you will discover that of ten thousand great product ideas only a few were even qualified successes. The same reasoning applies to selecting the right business. You must select a business for which there is a strong need and demand in the marketplace. The world may need an automobile that runs on sunlight and is pollution free, but is there much of a demand for a vehicle with limited range and a cost exceeding conventional automobiles? Consequently, you may find yourself floating many ideas among your friends and close business associates before you find one that appears to work. Why? Because as the late comedian Sam Levenson said, "getting everyone involved not only spreads the work around; it also speeds up the education process. You must learn from the mistakes of others. You couldn't possibly live long enough to make them all yourself."

Even in the instance where your initial market research indicates a genuine need, you should test market your idea to determine the amount of demand, if any. Without demand there is no revenue. After-all, you are going into business primarily to make a profit. A few more words about market research.

To be successful, you must know your market. To learn the market you must research it, a process that takes time and effort. Researching the market is a way to gather facts about potential customers, increase and update your knowledge and to determine the demand for your product or service. The more information you gather, the greater your chances of correctly identifying and capturing a market niche and avoid wasting your time and money. A considerable amount of market information is available on the Internet for free or for a nominal charge, but nothing substitutes for firsthand knowledge of the market and the ability to interpret the information in an unbiased manner. Accordingly, you may want to enlist assistance of a professional to assist, at a minimum, in the interpretation of the market information and to suggest other sources and techniques. Finally, the ultimate way of judging the demand for your business product or service is starting your dream business on a part-time basis, if possible, while you are still employed in your present career. In other words, 'if you walk the land and kick the sod' as they say in North Carolina, you should learn the real worth of your business idea.

To illustrate the application of the three rules of selecting a business, I recently was sent a business plan requesting my participation in the management team and assistance with the funding process of a company. The company was a start-up computer information firm. The company was about to launch its first marketing push. It was clear from the business plan that the operating principals of the company had given proper time and consideration to their venture. The principals also had an excellent background in the specific industry niche and there was no question that these people, except for finance expertise, had the talent to succeed. However, I did not pursue the venture. What possible reason would I have for rejecting such a well-conceived plan?

The reason I rejected the business plan goes to the importance of market research. The company had not determined the market need or demand for its service adequately. They based their revenue projections on their 'gut' belief of market need or acceptance of their idea without speaking to one major player in their market niche. They believed that the technical sophistication that they would introduce would entice people, in droves, to abandon their present practices and use their service.

My generic inquiries, however, indicated that the market players were very satisfied with how their needs in this area were presently being met. This company's service appeared to be viewed as an unnecessary complication of a market that already functioned well. The potential competitors also posses the resources to copy the company's technology and possibly even improve upon it in short order. In other words, the company should have known that technological superiority in this market niche was about eight hours long. This is true in many markets today. We truly live in a global technological society. Often, the first company that introduces a new technology captures enough market share. Later improvement on the technology does not dislodge the business from its market position. However, there were also strong interlocks between the potential competitors and the company's potential customers that the company appeared to have ignored. These interlocks caused me more concern than the technology obsolescence issue. In addition, the company had placed a high value on the 'sweat equity' of the founders, including non operating directors. This sweat equity diluted the investment of future shareholders dis-proportionately. Finally, the company appeared unable to respond to my concerns. Because of the preceding issues and the closed mind of the management group, I estimated their probability of success as unlikely and passed on the opportunity.

To sum up, we discussed three rules of selecting a business:

• Invest an adequate amount of time in evaluating your business. Do not place intense pressure upon yourself to come up with a selected business.

• Be realistic. Select a business that is right for your talents, skills, education, interest (hobbies), financial situation and personality. A business that is most likely an extension of what you are already doing.

• Is there a real need and demand for the business activity that you are contemplating? To be successful, you must know your market. To learn the market you must research it, a process that takes time and effort

II. Before You Reinvent the Wheel

You have now identified the business that will take you down the yellow brick road to success. You immediately take out one of the many fine texts on starting a business and turn to the section on business planning for a start-up or a de novo company.

First, I would like to ask you if you are defining a start-up business too narrowly? Before you start preparing a lengthy business plan, ordering your stationary and signing a lease just maybe you need to expand you definition of a start-up business beyond a de novo company and apply some of that common sense that got you this far.

Besides a de novo company, I suggest that your definition of a start-up business also include:

• Companies purchased out of bankruptcy

• Franchise businesses

• Management buyouts

• Purchased entities

I will briefly comment on each of the above start-up opportunities.

Companies purchased out of bankruptcy - With the assistance of a financial advisor and special legal counsel, you may be able to identify a business that is sitting on the brink of bankruptcy. This business, I assume, meets your requirements except for the fact that it is heading for either Chapter 7 (liquidation) or 11 (reorganization) under the Federal Bankruptcy Code. An opportunity exists to present a plan that will be acceptable to the parties and the Court that effectively uses the bankruptcy procedures to cleanse the company of the reasons it failed (e.g., poor management, unusually heavy debt burden, high lease cost).

This strategy permits you to start a business for a bargain price, but also involves complex negotiations, front-end costs of professionals and the risk that you will end up with nothing. This is not a path that I would recommend for those not well capitalized and advised in bankruptcy law and procedures and the turnaround of troubled companies.

Franchises - Franchise businesses generally let you purchase the rights to do business under the franchiser's name in a specified territory subject to certain contractual provisions. Franchises should offer you, the owner/operator, a recipe approach with a proven track record accompanied by a considerable amount of on-site and off-site support. In exchange for these rights and support, you pay a franchise fee plus a percentage of your revenue to the franchiser.

The franchise industry touts the high success or survival rate of franchise businesses versus a de novo approach. Do not let your guard down. My research questions this assumption's validity. However, if using a proven formula approach appeals to you and there are many excellent and some not so excellent franchise opportunities today, please approach the venture in the same professional manner that you would approach a de novo business. The only exception is that you have to be more cautious and thorough because you will be entering into complex business negotiations out of the box without any seasoning. You must engage a financial advisor and a lawyer who specializes in franchising law to assist you to analyze and negotiate the transaction.

Management buyouts - The idea of buying the company that presently employs you probably has not occurred to you. Possibly, because the parent company is classified as a Fortune 500 firm. However, I have negotiated management buyouts of a division and subsidiaries of major companies. The transactions were time consuming and involved complex financial and other sensitive considerations, but were preferable to a de novo approach in each instance.

As American industry continue to transition, millions of Americans are being left behind. You may be one of these Americans or may know someone in these circumstances. Why throw away valuable human resources without any attempt to recycle them?

Recycling is not retraining, but a restructuring and re capitalization of about to be 'discarded segments' of American Industry. Discarding that may make strategic sense to conglomerates in a survival mode. But it's possible that these discarded segments of American Industry can be restructured by local management and labor to profitably serve the existing or a new customer base. In the 1990's, we call such recycling management buyouts.

There is no time to be lost when faced with closure. Management and labor must take control of their destinies and obtain expert assistance. However, restarting a company with established management and labor may be far preferable to starting the same business on a de novo basis.

The capital markets await management buyout groups that can present well thought out proposals that offer appropriate risk adjusted rates of return. If the opportunity presents itself or can be developed over time, obtain expert assistance immediately.

Purchased entities - The purchase of an existing, profitable business offers you an established image, infra-structure and a customer base, among other values. Of course, these elements come at a price. The present owner will expect you to pay a premium over the book value of the business for his or her goodwill. In addition, you will have to expand time and expense to perform due diligence and a valuation of the business. Similar to acquiring a franchise you should employ professionals to assist you in the financial evaluation and lengthy negotiations.

I have a bias against new entrepreneurs paying for value created by other parties and becoming involved in complex negotiations before they have started in business. While an acquisition strategy is often an excellent approach for expanding an operating business, the risk of not getting what you expect is too great in the case of a new entrepreneur. Remember, the seller always knows more than the buyer. This is doubly true in an acquisition by a new entrepreneur.

III. Conclusion

You have now made considerable progress since you started on the road to business ownership with the first article in this series entitled, A Start-Up Business: Do You Have The Right Stuff? If you are getting impatient, please take a deep breath. A business owner must have patience and thoroughness. You are not playing monopoly. In this game of business start-ups, there is very little room for error.

Once you have selected the correct path for your business venture, you will be farther down the road to success than you realize.

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