Why You Should Run Your Own Business
- My First Business – Selling Gum and Candy on the Bus
- Imagine Getting Paid a Salary to Sell on the Bus – What Would you Make?
- Risk versus Reward
- Get All the Work Experience You Can
- Focus on Work Experience Early On – Not Your Salary
- What Money Looks like to an Employee vs. Employer
- Critique of Inc. Magazine’s 9 Reasons to Work for Yourself
- Please comment
Inc. Magazine spurred me to write an article I’ve been thinking about writing for a while. I’m sure there are also books on why you should work for yourself, but I’ve never read them. I simply started with work experience, my first ‘business’ selling candy on the bus in 5th grade . . . until a jealous kid told on me and my business went underground (it didn’t go under – it went underground … key difference). I used to walk to the local pharmacy, buy discount candy for something like $1 for a 6-pack of gum and then sell the packs for $1 each on the bus. In some cases, I got much more than that.
Now imagine if you’re working for someone paying you a salary to do that. The total profit is $5 and you’re being paid hourly to work. We’ll leave out taxes for the moment, because 5th graders usually don’t file tax returns, but if you’re being paid a salary for your work your boss certainly isn’t going to lose money on you. More than that, he’s not even going to give you half of his profit . . . because he could make much more without you. Look at it from his perspective: if he hires an employee, his income would be cut in half. Further, what if he’s paying you your salary regardless of number of sales. Now he may not sell out all his inventory even with your expert sales skills. So he has to leave some slack in the system to ensure he doesn’t lose money by hiring you. The best you can expect in real world scenarios is probably about 1/3 of the net profit. Here, assuming no advertising expenses, as a worker you can maybe take in about $1.75 while your boss keeps $3.25. Thus, we have different classes of people.
Now, maybe you’re fine with that. You’re happy with a nice steady job and a salary. There is much less risk in that and you are much more insulated against the natural rise and fall of business. You get your $1.75/day salary, for example, whether your company sells $0 of gum or $20 of gum that day. That works well for many, but a) instead of earning $0 one day, you may lose your job and earn $0 for a very long time until you find a new job, and b) you could be making a lot more . . . if you can find business.
That “if” is a big “if”. The hardest part about working for yourself, in my opinion, is not making and selling a good product. If you want to make a quality shoe or be a quality teacher, it can be done. Problem is that it may take a whole lot of marketing dollars to get your shoe out there, and you’ll have to deal with supply chains, inventories, and so forth. For my clients that move in that direction, unless they’re experienced, I usually gear them towards trying to license to a bigger company. This is less risk, but it is still, at the end of the day, less reward. If you can really follow through and take a product to market, you will have 100% of the risk, but will also have 100% of the reward. Balance that with say, a 6% license agreement but 0% of the risk . . . and if the licensee doesn’t make sales, you could still have a 0% reward. An actuary might make better use of this data, but the bottoms of “doing it yourself” versus “working for another” are both 0 or close to it. The top of the range for “doing it yourself” will be about 3x higher (versus salaried employee, at low end) or 16x higher (versus a standard license agreement).
In my profession, law, the way it works at many large law firms is you can expect that if your salary is $100k a year, you need to bill clients $300k a year. Where’s the other 200k going? Typically, about 100k is going towards expenses and another 100k towards partners and their second houses and so forth. 2/3 of your hard earned work is being skimmed off the top while you give up your control of vacation days, hours, and in many cases, real human interaction.
That being said, the work experience is usually vital. Personally, I stuffed law school into three days a week and work into the other two days a week. (My last year in law school was interesting – I also had an unpaid externship for credit and was actually working for two different law firms.) Once I learned the trade, taking the advice of a law school professor mentor, I found those around me who knew more from whom I could seek advice and information from and with that, started my own firm out of law school. My wife, after gaining her experience, is doing the same thing these days – http://therapy-nj.com . Compare what a therapist makes at an agency ($20 – $30/hr, and agencies are always bleeding money / the 1/3 rule doesn’t even apply) compared to what they can make in private practice (sometimes $100, $200, or even $300/hr!). If you were busy 40 hours a week at your job, and now you’re only busy 20 hours a week working for yourself (and leaving in some leeway for your advertising costs), you’re well ahead of the game.
My first jobs at law firms were as glorified administrative assistants. My first employer simply couldn’t type and wasn’t much for computers, so I typed almost all his work and thereby, started to learn the trade. After that, I found a better place to work with even better experience doing more legal work. From there, I could have potentially kept going to bigger and better, but you’re always just a cog in something larger. It’s just a bigger cog with typically longer hours and less control over yourself. The point of working for yourself is to largely exit from this system (at least in the working world) and be the machine, not the cog. That’s the goal . . . get the work experience to be the machine and ignore the details such as “prestige”.
If you’re planning on going out on your own in business, don’t worry so much about the salary you’re making. I’ve been on both sides of the desk – first, only the “looking for work” side, and now on the “hiring” side. I’m going to use my own profession for this example, as I know it best. With minor edits, I think it applies across the board. A mistake I once made was hearing something like, “Lawyers make starting salaries of $x/yr.” So at an interview with a New York City law firm, when they pressed me for what salary I wanted, refusing to name a number first, I said “$(2/3)x.” Now, I knew only a small fraction of lawyers made $x as a starting salary, but I thought I was worth at least 2/3 of that. I still think I was worth it. Later on, I ran into one of the lawyers interviewing me who told me it was down to me and one other. It came down to money. I lost out on the “big” job for the large Manhattan firm, but actually, I won because now I’m making more than x and that ‘loss’ spurred me on to start my own law firm rather than delay and possibly get too old and have too many expenses to take the risk.
Now, on the other side, I’ve had people insinuate that they deserve $(2/3)x and that’s quite a scary proposition to pay someone that much of my income! I have to be steadily making 2.5x for even to be worth it. Why do I want to give you anywhere near half of my hard earned money when I’ve done all the work and taken all the risk to get there? Further, who says my income won’t go down and then I’ll be paying you more than I keep for myself?
On the other hand, I’ve had people write or call me looking for a job who will say, “I’m just looking for experience. Whatever you can pay me is great.” One of those people works for me now, while another who I tried early on, demanding this and that to work for me but unable to produce is still not working in my field years later.
When your expenses/income are $1500/month, it’s much easier to start your own firm than when your income/expenses are $3000/month, $5000/month, and so forth. You have to temporarily drop to $0 income while you start-up. Even better, work for someone part-time while starting up and leave when your own business is paying you better. Get the best of everything and mitigate your risk.
Inc. Magazine lays out some of this – some of it is also silly. Here’s their list:
1) Develop a product they wanted but couldn’t find – You need to find a market and a niche. True. When i sought per diem public defender work, having experience with this in law school, they wanted to make sure I wouldn’t leave when I found a niche doing something that paid better. They were right. I stopped doing public defender work (which is a story by itself and the money is far from the only reason I stopped doing it).
2) Make a name or yourself – Who cares? You can get your name on a huge law firm to make a name for yourself. You can be more “prestigious” by being the head of a huge organization. If you’re life is about working, sure, go for it. I prefer to have direct client interactions, not interactions with a boss throwing work at me and a computer screen (though I get plenty of the latter). I prefer to own my own work and aside from some of those who have sold their souls to law firms, or whatever other company, on your own, you can do better than 90% of their employees . . . and go home at 5pm if you so choose. I know I so choose.
3) To build a better company – This one I strongly agree with. Ever call a law firm and try to get an Attorney on the phone? At smaller firms, often the best you’ll get is voicemail. At larger firms, you might get the lawyer’s secretary’s secretary. Bob Parsons, founder of GoDaddy.com, will tell you never answer your own phone. I disagree. Always answer your own phone. I’ve gotten so many clients who have said something like, “Wait, you’re the lawyer? I’ve called so many firms and have been unable to reach anyone! When can I make an appointment?” At my firm, only lawyers answer the phone . . . and our website has real information that people want to know when they look for a Patent or Trademark Attorney. Many other legal websites are sort of like, “Here’s my picture and why I’m so great.” I suppose there’s a client base for that, but my niche is, “Here’s all the info you want to know about patents and here’s the work product. Call me and I’ll answer my phone so we can talk more.”
4) To be part of a great team – This one seems counter-intuitive to me. No one knows you better than you. No one will work as hard on your baby, or care about your baby, as much as you do. No employee of yours will ever care about your business the way you do. As an employee, you’ll never care about your company as much as if it were your own. I’m all for “team me”.
5) Come up with a breakthrough – See 3.
6) To prove a vision – See 3 again.
7) Out of necessity or desperation – This one is a great motivator. Works wonders. If you ask in sincerity, it may very well come. If you desire it, you can make it happen. People work hardest when they’re hungry.
8) They were young and could afford to take risks – My law school professor / mentor told me that if I were going to go out on my own, do it early before I had real expenses to worry about. Great advice. (See above discussion under, “Focus on Work Experience…”)
9) They saw a huge opportunity – For me, this was search engine marketing. Lawyers, as a whole, seem to tend to be pretty lousy at entrepreneurship and search engine marketing. Thanks in part to this blog and the content of my website, I found my niche for getting my firm out there to potential clients. Find yours.