The Illusion of Owning a Business

by FREDERICK W. COPELAND

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AS AN elder business executive, I am approached from time to time by young men who are emerging from educational or military training and want advice on the selection of a career.

Today’s young man is no worshiper of Horatio Alger. He has watched his father carrying an increasing load of worry as he rose in prominence — always fussing about taxes, inflation, labor, and rising costs. The son s goal is simple and specific; he likes to think of himself with a wife and a couple of kids, a small house, a secondhand station wagon, a trailer, a boat, and a pair of skis. He already has definite plans for his weekends and his annual vacations. An income of $8000 a year will suit him perfectly, and he is much more interested in reaching that point as rapidly as possible than in shooting for $100,000 a year eventually.

He does not care particularly how he earns his $8000, and he expects to work hard. But he has one very specific reservation: “I am not going to spend my life taking orders from someone else or licking boots to get a salary raise. I am going to own my own business and work for myself.”

Admittedly there is no more satisfied businessman than he who owns and operates his own established and profitable business. He has the fun of making all the decisions and of keeping all the rewards of success. He does not have to defer to the orders or moods of others, and he can exercise his own whims and moods as he sees fit. He can sleep late in the morning if he is tired and go fishing when the tish are biting. He can take out all the profits currently or leave them in the business for future growth. Within reason he can have tax-free luxuries by charging the business with club dues, home entertaining, and trips to New York, Florida, and even Europe. And, of course, the business is charged with the purchase and upkeep of his Cadillac.

When you meet this lucky man, however, and he brags about the joys of independence, you will find it interesting to draw him out on the subject of his early history. Unless he inherited the business he will be proud of the hardships and narrow escapes he suffered before he got his head above water. He will tell you how he, and usually his wife, worked twelve hours a day, seven days a week, because they could not afford to hire a stenographer, bookkeeper, or janitor; how he did not take a vacation until he was fifty; how, on various occasions, he was down to his last dollar and had to bluff his creditors or get a prepayment from a customer. And as you listen to his life story, you will recognize that his success is the result of a combination of special skill, shrewdness, willingness to gamble, hard work, personal sacrifice, and usually some luck.

Ordinarily this businessman has all his eggs in one basket: all his personal capital is invested in his business. On paper he is a wealthy man, but little of his wealth is in liquid form. What will happen to his estate if he dies? The inheritance tax people will put a high value on his company holdings, but there will not be enough cash to pay the tax. Should he sell the business while the going is good? How about straddling the issue by selling a portion of the business for cash.”No, that would mean sharing ownership with a stranger and losing most of the fun. How about gradually transferring ownership to his son, so that there will be no inheritance tax? Is his son capable of carrying on the management? Suppose he conveyed ownership to his son; would his son get greedy and crowd the old man out?

If he is a manufacturer, he is always afraid that a competitor will outdesign him, steal his best man, or start a price war, and he has the constant dread of arriving at the shop some morning and finding a union picket at the gate. The personally owned company is usually too small to be diversified in products and personnel; one hard bump in the form of a lawsuit, a bad account, or the loss of a key man can do irreparable damage.

This successful man represents not more than one per cent of t he men who started their own businesses when he did. It is my best guess that out of one hundred starters forty fall by the wayside and fifty-nine become hopelessly locked into a marginal situation, with all resources tied up in the struggle to survive, with a net profit lower than the wages they could earn outside, and with absolutely no escape because they cannot sell out. Statistics show that, in 1955, 65 per cent of the total business failures were for amounts of $25,000 or less; 56 per cent of the total failures were companies five years old or less. Dun & Bradstreet reports that 90 percent of all failures are attributable to inexperience and poor management.

Disregard for odds and complete confidence in one’s self have produced many of our greatest successes. But every young man who wants to go into business for himself should appraise himself as a candidate for the one percent to survive. What has he to offer that is new or better? Has he special talents, special know-how, a new invention or service, or more capital than the average competitor? Has he the most important qualification of all, a willingness to work harder than anyone else? A man who is working for himself without limitation of hours or personal sacrifice can run circles around any operation that relies on paid help, particularly if it is unionized. But he must forget the eighthour day, the forty-hour week, and the annual vacation. When he stops work, his income stops unless he hires a substitute. Most small operations have their busiest day on Saturday, and the owner uses Sunday to catch up on his correspondence, bookkeeping, inventorying, and maintenance chores. The successful self-employed man invariably works harder and worries more than the man on a salary. His wife and children make corresponding sacrifices of family unity and continuity; they never know whether their man will be home or in a mood to enjoy family activities.

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IF YOU are burning with an inspiration to invent a new product or serv ice, it would be a great pity not to give it a good try. But do not overlook the time and loss element. You must first develop the product or service to your own satisfaction; next, demonstrate it to the satisfaction of the trade; next, make the public aware of its virtues; and finally, arrange that the willing buyer can get prompt delivery and service. In the meantime you must eat.

This brings us to the critical subject of capital. After the war several young men came to me saying, “I have saved up $10,000 and want to go into business for myself. What do you suggest as an activity?" They assumed that this amount of money had a tremendous impact. They expected to make a living wage at once, get a good return on their capital, and run a steadily growing business. Their faces fell when I suggested, in all seriousness, a filling station, a hamburger stand, a laundromat, a radio-repair service unit, or a vending machine route. They wanted something where they could hire someone else to do the leg work.

I explained that every man has two assets, his services and his capital. His services, whether he is working for himself or for an employer, have an open-market value (probably $350 per month for an inexperienced man with a college degree). The return to be expected from capital depends on the risk; 6 per cent would be good if he wanted safety. Why should he expect more income unless he developed a special skill or took greater chances?

I told each man not to expect that his college degree or recent knowledge of the humanities will give any immediate edge over the high-school graduate who has already been on the job for four years; that comes later when he has caught up in applied knowledge. I explained that with few exceptions it takes money to make money in business. Someone has to put up the money for equipment, inventory, and operating expenses before there is a dollar of income. Even a free-lance commission salesman must finance his living; and travel expense until he builds up an income.

The young men showed me advertisements from the Business Opportunity columns of the newspaper: “Good Business for Salt—$10,000"; also, “Want Partner in Profitable Business — $10,000 Investment.”I asked, “What kind of going business do you think you can get for $10,000? Remember that your money must cover both purchase price and working capital. If it is a store or a manufacturing operation, you would be lucky to turn your capital three times a year (unless working on credit.) With capital of $10,000 you might expect annual sales of $30,000 to $50,000, and a net profit of $5000, before a salary for yourself and taxes. Now take the case of the man who is advertising for a partner with $10,000. If he had a good thing, he would not have to appeal to strangers. Select ing a partner is almost as delicate an operat ion as choosing a wife.”

Probably the easiest and quickest way to become an independent businessman is to be a commission salesman or manufacturer’s agent. You are given a sample kit, a price book, some order blanks, and a pat on the back. You are completely on your own and you sink or swim on your own. You do not have to tie up any capital in inventory or accounts receivable; neither do you get any salary or expense account. It stands to reason, however, that no one is going to give a very hot item or an established territory to an inexperienced salesman.

Some young men seem to think that if they have a new idea and good character they can borrow their starting money from a bank or from the Small Business Administration without collateral. They do not understand that any new venture is a gamble and that the lending institutions cannot see any merit in a transaction in which they stand to lose 100 per cent or at best get their money back plus a small interest. Private moneylenders are not interested in advancing money to set up a business; the anti-usury laws will not allow a rate of interest commensurate with the risk. Beware of any individual who offers to lend you capital at the legal rate of interest plus outside considerations such as a commission on sales or management fee.

I personally would rather see a young man work for someone else for ten years until he has learned the business and matured in his judgment. Then he can evaluate his own talents and the cost of getting started on his own. I hate to watch some fine young man start his career with a blind stab at a hopeless venture, and then, after sweating it out for five years, have to give up and look for a job. The personnel manager of the employing company asks him, “In what category do you classify yourself: design, production, sales, accounting, administrative?” The young man has to reply, “I have been the president of a company with three employees. I have a smattering of all functions but cannot say I am expert at any of them.” How can the personnel manager place him? The general experience is valuable, but he cannot put the young man in a job above more experienced men and he cannot start him at the bottom because he is too old or cannot live on a learner’s pay.

Everything I have said, so far, has been negative and discouraging to a young man contemplating starting a business of his own. I admit that inmost cases my advice is: “Drop the idea of self-employment. Get yourself a job wit h a good-sized company and invest your money in A.T.&T. stock. If you have a yen to be an inventor, get a job as a designer; if you have already invented some gadget, turn it over to a large manufacturer on a royalty basis. If you want to be a merchandiser, get a job with Sears, Roebuck. If you think you like manufacturing, try to get a job with some company in the $5 million to $10 million class, large enough to be solid, small enough to be personal. If you aim to be on your own eventually in insurance or real estate, spend some years under a first-class operator. Let someone else pay for your training and your living expenses.”

If you are completely vague about a career, go to some company that is expanding in an expanding industry and say, “I want a job in this company. I will do anything, go anywhere, and accept any pay you care to give me.” In an expanding company there is likely to be more rotation and upgrading. I caution against starting with a small and young company, regardless of the charm of companionship, the early assumption of responsibility, and the dream of being in on the ground floor of what may someday grow rapidly in size. When, without special ability or experience, you start a new job, you are gambling on your ability to make good. If there is a chance that your employer will fail and go out of business, regardless of your ability, you are pyramiding the odds against you. In a small company there are few openings at the top and these are closely held by the owners.

Generalizations are always dangerous because they can be refuted by exceptions. You may be the exception. If you have guts and determination and no silly scruples against long hours, dirty hands, and waiting on customers over the counter, you may be able to get into some service operation without much capital and without having to wait to get a living wage. Don’t sneer at the small service operation. If you can learn that business and make good at it, you can expand indefinitely and eventually break into the big league. If you have enough capital to live on for two or three years, you should be able to set yourself up in some commissionselling operation that will snowball into a profitable business if you work hard on it. If you have substantial capital, say $50,000, you might buy a hardware store, where the assets are all in solid inventory and the momentum should carry the business until you learn how to run it.

There are always a few cases of brilliant young men who have had rapid and phenomenal success. Such men have an uncanny sense of timing and opportunity. They gamble cheerfully with their own and other people’s money and start a second gamble before they know the results of the first one. After the war one young veteran, in complete disregard of my sincere advice, used his $10,000 as a down payment and with government financing built a $100,000 apartment house. With his profit and government financing he undertook to build ten G.I. homes, which he sold before completion. Now he is a big operator.

Another young man secured a government development contract for a scientific product, on a cost-plus basis. He did not make much profit on the transaction, but the contract financed him in building a staff and equipping a plant with which he now makes products of his own. Another man brashly cont racted to buy a $100,000 business with $10,000 down (every cent he had in the world), agreeing to pay the balance out of future earnings. Another paid $5000 for an option to buy a piece of property at $200,000; he turned around and sold it to a third party for $250,000. In all of these cases the individual gambled to the limit and would have been cleaned out if t here had been any setback. We do not hear of those who gambled and lost.