The Pros & Cons of Going into Business for Yourself — Part 3
Some contractors prefer to remain small, but it’s almost impossible to earn big bucks unless you grow big
Most contractors start out as a one-person operation, maybe with the spouse pitching in, as we discussed last month. At most, they may have a partner and perhaps an employee or two. Few new contractors can afford to support multiple rigs and an office staff. That’s why they can expect to put in so many hours. Some people think one of the attractions of owning your own business is the ability to work at your own pace and take time off when you feel like it. That works in theory, but the reality for most small contractors is that survival means spending almost every waking hour either working or thinking about the business.
Still, many company owners choose to remain small. They believe this creates fewer headaches. This is a personal decision and not necessarily a bad one depending on their goals. There are indeed fewer headaches when you have only yourself to manage. But keep in mind that staying small also has its drawbacks.
The biggest is simply that it limits one’s income potential. For instance, a rule of thumb for small shops is that the owner can expect to take home about 10 percent of billings as personal compensation. So, to make $50,000 a year, the contractor needs to book around $500,000 worth of work. How realistic is that? It comes out to almost $42,000 a month, which translates to a little under $10,000 a week, or a little under $2,000 a day, every working day. How many of you have the capability of booking that much work? Even if you could pull it off, it virtually guarantees 60- and 70-hour workweeks when you factor in paperwork, marketing and other administrative tasks.
And this is just to earn 50 Gs. If your goal is that magic six-figure income, it’s so much harder to obtain as a one-person operation.
Like all rules of thumb, the 10 percent rule is not carved in stone. Some small contractors put more than 10 percent of billings in their pockets, and as companies grow larger, the percentage taken by the owner tends to decrease. For example, you won’t find many owners of a $10 million business compensating themselves to the tune of $1 million a year. As contractors grow larger, additional overhead tends to eat up money at a faster rate. Nonetheless, if making big bucks is your goal, it virtually demands that you grow your business to a decent size.
Growth means hiring other people to work for you. Finding good people is perhaps the most difficult part of running a business.
Managing PeopleEven if they find good employees, keeping them happy is not easy. Managing people is an art. Big corporations devote many hours of training before they put someone in charge of others. People in a small company seldom get any management training at all. They simply get promoted and suddenly find themselves supervising other people.
A contractor wouldn’t think of sending a raw novice out to a job site without some amount of craft training and close supervision. Well, people are even more complicated than drilling a hole, yet most contractors put crew leaders or foremen in charge of other people without a single minute of management training. One reason why so many trade workers are itching to go to work for themselves is because they confront so many supervisors who are ill-equipped for the role.
And thus, the cycle perpetuates itself. Trade workers who get treated like dirt become business owners and treat their people the same way, because that’s all they know. But if they want to grow their company, success will depend not on them alone, but on the people they hire. Somehow they must motivate them to peak performance. While some may have the ability, the vast majority does not. As we noted last month, just as great athletes don’t necessarily make the best coaches, there is not a shred of correlation between craftsmanship and leadership ability. There might even be a slight negative correlation, because superior craft workers tend to be at their best working alone.
Legal IssuesOur legal and regulatory system presents another formidable obstacle to those who would run their own business. Business owners often spend more time filling out government paperwork than they do managing their businesses. Every government agency from OSHA to EPA to EEOC to DOE to DOT has its hands in the work done by drilling contractors.
Also, all contractors live under the constant threat of lawsuits for things beyond their control. Something can go wrong at the job site that injures someone or causes damage to the customer’s premises. Lawsuits can get filed by workers who get hurt on the job, by employees who feel they’ve been mistreated, by customers who think they got a raw deal. Sooner or later, most businesses get caught up in litigation of some kind, and if you want to see how fast money can get sucked into a black hole, just wait until you start dealing with lawyers.
SummaryJust as we did with the plus side, let’s summarize the downsides of owning one’s own business:
- You probably won’t make as much money as you think you will.
- You risk the money you’ve invested and maybe borrowed to open up shop.
- You are guaranteed to work long hours.
- As a one-person operator, you need to provide some sort of backup plan in case you get sick or want to take some time off.
- If you are not a one-person operator, you have the headaches of hiring and managing other people — and the unpleasant duty of firing some along the way.
- You will spend a disproportionate amount of time dealing with legal matters and government regulations.
In summary, the odds are against people who start their own businesses. I don’t want to paint an overly bleak picture of business ownership, but I do think people need to go into such an important venture with their eyes fully open.
Obviously, the obstacles that I’ve just discussed can be overcome. Despite the odds, a fair number of trade workers do start up their own companies and succeed. Many live happy lives because they enjoy what they are doing. A few become wealthy beyond their wildest dreams.
What it boils down to is risk and hard work on one side of the equation, balanced by rewards on the other. Risk and rewards go hand-in-hand with business ownership. You can’t have one without the other.