Ylisa Sanford Seymour, an Ameriprise financial advisor based in Santa Rosa, Calif., has seen people fail—and succeed—at executing their small business dreams. She says one of the most important first steps is making sure family members, who will be directly affected by the ups and downs of the new business, are on board and supportive. U.S. News spoke with Seymour about how to launch a small business in the current economic environment. Excerpts:
What are the pros and cons of starting a small business in this kind of economic environment?
It can be a really great time to start a business, which is antithetical to what people presume. The down market can provide lower costs of real estate in terms of leasing space and lower labor costs because people are willing to work for less or for deferred payments with the option of equity. Larger groups of people are open to taking that chance of being an entrepreneur, because being laid off is that kick in the butt to take their idea to the next level. Things to consider include whether you have enough operating capital so if you have payables that haven't come in for 30, 60, or 90 days, you can still operate. For a lot of businesses, like a restaurant, you need to plan on not turning a profit for three years. So identifying your niche and having a well thought out strategic plan is paramount. Focusing on service, especially in a down market when people are less willing to part with their dollars, is the key to repeat clientele.
Are there types of businesses that are best to stay away from in a down market?
Some of the businesses that will be harder hit include more of the discretionary type of services, such as salons and spas. Certain franchises, such as large brand name ones that charge up to $20 million just to get the franchise license, are something you might want to stay away from. Something with a lower initial start-up cost, like an original idea, [could make more sense]. You also have to look at the overall environment. Sandwich shops are a good business model, but they're overly saturated. What about good ideas?
Clients who have automotive repair shops are doing well because people right now are rehabbing or refurnishing things. Clients have seen revenues increase because people are fixing their cars, rather than replacing them. Some service industries related to what happens when people get laid off, such as job counseling, continuing education, or retraining schools continue to do well. Do most small businesses fail, especially during a recession?
It's a high percentage that fail—upwards of 50 percent within the first three years. Some of the major issues are not having a well-thought out business plan, the inability to execute on an idea, and not having sufficient reserves and cash flow. They may not be able to get funding to start their business from traditional sources like the Small Business Administration, so they might be focused on their family or home to finance the business, which can be extremely risky. In this kind of market, are friends and family a good source of loans?
That's a personal decision. If you lend money to [a friend or family member], you need to be willing to give with expectation that you'll never get it back. Money within families can sometimes change the nature of a relationship and very rarely do I see it paid back or paid back with the interest that is quoted. If you have a good idea, you should be able to make a go of it from traditional sourcing of lending, such as micro-lending programs, different business associations, the Small Business Administration, and different angel investing sources. Family should be the last source. If your business fails, you still want to be able to go home for Thanksgiving.
What are the benefits of starting your own business in an industry that you've already been working in?
That will certainly help people, but I don't know if it's a requirement. Some of the most innovative businesses have been started by people who have no connection to what they're doing. One of my clients is a retired nuclear physicist, but she likes bookkeeping. Experience in the field is not a requirement.