| Rich Dad's Before You Quit Your Job |
By Robert T. Kiyosaki and Sharon L. Lechter C.P.A.
Genre: Business & Money
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Starting with the Right Mind-set
When I was growing up, my poor dad often said, "Go to school, get good grades, so you can find a good job with good benefits." He was encouraging me to become an employee.
My rich dad often said, "Learn to build your own business and hire good people." He was encouraging me to become an entrepreneur. One day I asked my rich dad what the difference was between an employee and an entrepreneur. His reply was, "Employees look for a job after the business is built. An entrepreneur's work begins before there is a business."
99% Failure Rate
Statistics show that 90% of all new businesses fail within the first five years. Statistics also show that 90% of the 10% that survive the first five years, fail before their tenth anniversary. In other words, approximately 99% of all startup businesses fail within ten years. Why? While the reasons are many, the following are some of the more critical ones.
1. Our schools train students to be employees who look for jobs rather than train entrepreneurs who create jobs and businesses.
2. The skills to be a good employee are not the same skills required to be a good entrepreneur.
3. Many entrepreneurs fail to build a business. Instead they work hard building a job that they own. They become self-employed rather than business owners.
4. Many entrepreneurs work longer hours and are paid less per hour than their employees. Hence, many quit out of exhaustion.
5. Many new entrepreneurs start without enough real life experience and without enough capital.
6. Many entrepreneurs have a great product or service but don't have the business skills to build a successful business around that product or service.
Laying the Foundation for Success
My rich dad said, "Starting a business is like jumping out of an airplane without a parachute. In midair the entrepreneur begins building a parachute and hopes it opens before hitting the ground." He also said, "If the entrepreneur hits the ground before building a parachute, it is very tough climbing back into the plane and trying again."
For those of you familiar with the rich dad books, you know that I have jumped out of the plane many times and failed to build the parachute. The good news is that I hit the ground and bounced. This book will share with you some of my jumps, falls, and bounces. Many of my failures and successes were small ones, so the bounce was not that painful-that is, until I started my nylon and Velcro wallet business. I will go into further detail throughout the book because I made many mistakes, and learned from them along the way. The success of that business was sky high and so was the fall. It took me over a year to recover from that powerful bounce. The good news is that it was the best business experience of my life. I learned much about business and about myself through the process of rebuilding.
The Crack in the Dam
One of the reasons I fell so hard in the nylon surfer wallet business was that I did not pay attention to the little things. There is some truth to the age-old statement, "The bigger they are, the harder they fall." My little surfer wallet business grew so fast that the business was a lot bigger than the capabilities of the three entrepreneurs who created the business. Instead of creating a business, we had created Dr. Frankenstein's monster and did not realize it. In other words, our sudden success was accelerating our failures. The real problem was we did not know we were failing. We thought we were successful. We thought we were rich. We thought we were geniuses. To the extent that we bothered to consult expert advisors (like patent attorneys), we did not listen to them.
As three successful entrepreneurs in our late twenties and early thirties, we took our minds off the business and partied into the night. We actually thought we had built a business. We actually thought we were entrepreneurs. We actually believed our own story of success. We started bragging. Champagne started to flow. It was not long before we each had fast sports cars and were dating even faster women. Success and money had blinded us. We could not see the cracks forming in the wall of the dam.
Finally, the dam broke. The house of cards started tumbling down around us. Our parachute did not open.
Too Much Success
The point in sharing my entrepreneurial stupidity is that many people think that it is the lack of success that kills a business. And in many cases that is true. The failure of my surfer wallet business was a valuable experience because I found out early in my career as an entrepreneur that too much success can also kill a business. The point I am making is that a poorly conceived business can fail whether it is initially successful or not.
Hard Work Covers Up Poor Design
A poorly conceived business startup may be able to survive as long as the entrepreneur works hard and holds the business together with sheer determination. In other words, hard work can cover up a poorly designed business and keep it from failing. The world is filled with millions of small business entrepreneurs who are able to keep their leaky business afloat with hard work, sheer willpower, duct tape, and baling wire. The problem is, if they stop working, the business breaks apart and sinks.
All over the world, entrepreneurs kiss their families good-bye and head off to their own businesses, their pieces of the rock. Many of them go to work, thinking that working harder and longer will solve their business problems- problems such as not enough sales, unhappy employees, incompetent advisors, not enough free cash flow to grow the business, suppliers' raising their prices, insurance premiums' going up, landlords' raising the rent, changing government regulations, government inspectors, increasing taxes, back taxes, unhappy customers, nonpaying customers, and not enough time in the day, to name a few of the daily challenges. Many entrepreneurs do not realize that many of the problems their businesses face today began yesterday, long before there was a business.
One of the primary reasons for the high failure rate of small businesses is sheer exhaustion. It's tough to make money and to keep going when so much of your time is tied up in activities that do not make you any money or that cost you money without offsetting income. If you are thinking about starting your own business, before you quit your job, you might want to talk to an entrepreneur about how much time he or she spends on non-incomeproducing activities to run his or her business. Also ask how he or she handles this challenge.
As a friend of mine once said, "I'm so busy taking care of my business I don't have time to make any money."
Do Long Hours and Hard Work Guarantee Success?
A friend of mine quit his high-paying job with a large bank in Honolulu and opened a tiny lunch shop in the industrial part of town. He had always wanted to be his own boss and do his own thing. As a loan officer for the bank, he saw that the richest customers of the bank were entrepreneurs, and he wanted a piece of the action, so he quit his job and went for his dreams.
Every morning, he and his mom would get up at four o'clock to begin preparing for the lunch crowd. The two of them worked very hard, scrimping, cutting corners, in order to serve great-tasting lunches with generous portions at low prices.
For years I would stop by, have lunch, and find out how they were doing. They seemed very happy, enjoying their customers and their work. "Someday we'll expand," said my friend. "Someday we'll hire people to do the hard work for us." The problem was that someday never came. His mom passed away, the business closed, and my friend took a job as a manager of a fast-food franchise restaurant. He returned to being an employee. The last time I saw him he said, "The pay isn't great but at least the hours are better." In his case, his parachute did not open. He hit the ground before he built a business.
Now I can hear some of you saying, "At least he went for it." Or, "It was just bad luck. If his mom had lived, they might have expanded and gone on to make a lot of money." Or, "How can you criticize such good hardworking people?" And I agree with these sentiments. My intent is not to criticize them. Although not related to them, I loved the two of them dearly. I knew they were happy yet it pained me to see them work so hard and not get ahead, day after day. I only relate this story to make the same point. The business began to fail before there was a business. It was poorly conceived before he quit his job.
Is Being an Entrepreneur for You?
If this story about working long hours or failing if unsuccessful and possibly failing if successful or jumping out of a plane without a parachute and bouncing frightens you, then being an entrepreneur may not be for you.
But if the stories intrigue you or challenge you, then read on. After finishing this book, at least you will have a better idea of what entrepreneurs need to know to succeed. You will also have a better understanding of how to create, design, and build a business that grows with or without you, and possibly makes you rich beyond your wildest dreams. After all, if you are going to jump out of a plane without a parachute, you may as well win big if you are going to win at all.
The Job of an Entrepreneur
The most important job of the entrepreneur begins before there is a business or employees. The job of an entrepreneur is to design a business that can grow, employ many people, add value to its customers, be a responsible corporate citizen, bring prosperity to all those that work on the business, be charitable, and eventually no longer need the entrepreneur. Before there is a business, a successful entrepreneur is designing this type of business in his or her mind's eye. According my rich dad, this is the job of a true entrepreneur.
Failing Leads to Success
After one of my demoralizing business failures, I went to rich dad and asked, "So what did I do wrong? I thought I designed it well." "Obviously you didn't," rich dad said with a smirk.
"How many times do I have to do this? I'm the biggest failure I know." Rich dad said, "Losers quit when they fail. Winners fail until they succeed." Shuffling the papers at his desk for a moment, he then looked up at me and said, "The world is filled with want-to-be entrepreneurs. They sit behind desks, have important sounding titles like vice-president, branch manager, or supervisor, and some even take home a decent paycheck. These want-to-be entrepreneurs dream of someday starting their own business empire and maybe someday some of them will. Yet I believe most will never make the leap. Most will have some excuse, some rationalization, such as, 'When the kids are grown.' Or, 'I'll go back to school first.' Or, 'When I have enough money saved.'"
"But they never jump from the plane," I said, finishing his thoughts. Rich dad nodded.
What Kind of Entrepreneur Do You Want to Be?
Rich dad went on to explain that the world was filled with different types of entrepreneurs. There are entrepreneurs who are big and small, rich and poor, honest and crooked, for-profit and not-for-profit, saint and sinner, small town and international, and successes and failures. He said, "The word entrepreneur is a big word and it means different things to different people."
The CASHFLOW Quadrant
As I mentioned in the introduction, the CASHFLOW Quadrant explains that there are four different types of people that make up the world of business and they are often technically, emotionally, and mentally different people.
E stands for employee.,br>
S stands for self-employed or small business owner.
B stands for big business owner (over five hundred employees).
I stands for investor.
For example, an employee will always say the same words, whether he or she is the president or janitor of the company. An employee can always be heard saying, "I'm looking for a safe secure job with benefits." The operative words are safe and secure. In other words, the emotion of fear often keeps them boxed in that quadrant. If they want to change quadrants, not only are there skills and technical things to learn, in many cases there are also emotional challenges to overcome.
A person in the S quadrant may be heard saying, "If you want it done right, do it yourself." In many cases this person's challenge is learning to trust other people to do a better job than he or she can. This lack of trust often keeps them small, since it's hard to grow a business without eventually trusting other people. If S quadrant people do grow, they often grow as a partnership, which in many cases is a group of Ss binding together to do the same job.
B quadrant people are always looking for good people and good business systems. They do not necessarily want to do the work. They want to build a business to do the work. A true B Quadrant entrepreneur can grow his or her business all over the world. An S quadrant entrepreneur is often restricted to a small area, an area he or she can personally control. Of course, there are always exceptions.
An I quadrant person, the investor, is looking for a smart S or B to take care of his or her money and grow it.
In training his son and me, rich dad was training us to first build a successful S quadrant business that had the capability of expanding into a successful B quadrant business. That is what this book is about.
What Kind of Business Do You Want to Build?
As part of my entrepreneurial training with rich dad, he encouraged his son and me to go out and study as many different types of business systems as we could. He said, "How can you be an entrepreneur designing a business if you do not know about the different types of businesses and entrepreneurs?"
Rich dad was adamant in explaining that many entrepreneurs were not business owners but self-employed entrepreneurs-entrepreneurs who owned a job, not a business. He said, "You are probably self-employed when your name is the name of the business; your income stops if you stop working; if clients come to see you; your employees call you if there is a problem. You may also be self-employed if you are the smartest, most talented, or the besteducated person in your business."
He had nothing against self-employed entrepreneurs. He simply wanted us to know the difference between entrepreneurs who own businesses and those who own jobs. Consultants, musicians, actors, cleaning people, restaurant owners, small shop owners, and most small business people fall into owning jobs instead of businesses, or the S quadrant.
The main point rich dad was making about the difference between a selfemployed entrepreneur and a big-business entrepreneur was that many selfemployed businesses have a tough time growing into a big business. In other words they have a real challenge going from the S quadrant to the B quadrant. Why? Again the answer is that the business was poorly designed before there was a business. It was doomed before it was even started.
Rich dad himself started out as a self-employed entrepreneur in the S quadrant. Yet in his mind, he was designing a very large business, run by people much smarter and more capable than him. Before he started his business, he designed his S quadrant business to be able to grow into the B quadrant.
Professionals and Tradespeople
He also wanted us to know that many professional people such as doctors, lawyers, accountants, architects, plumbers, and electricians started a selfemployed style of business based on a profession or a technical trade. Many of these professions and trades require government licenses to operate. Also included in this category are professional salespeople, many of whom are licensed independent consultants, such as real estate, insurance, and securities salespeople. Many of these types of people are technically selfemployed entrepreneurs, aka independent contractors.
The problem with this type of business is that there is not really a business to sell because there really isn't a business outside the individual owner. In many cases, there really isn't an asset. The business owner is the asset. If he or she does sell, he or she will not typically get the higher multiples a true B quadrant business can command. In addition, he or she may have to agree to "stay on" for the successful continuation of the business. In essence they go from being the owner to the buyer's employee.
In my rich dad's mind, it made no sense to work hard and not build an asset. This is why he advised his son and me against ever wanting to become employees. He said, "Why work hard building nothing?"
Later in this book, we will go into some ways this type of entrepreneur can create a business asset-an asset they can build and maybe sell someday.
Mom and Pop Operations
A very large category of entrepreneurs is often referred to as Mom and Pop businesses. This type of business gets its name because many small businesses are family businesses. As an example, my mom's mom owned a little convenience store that the family took turns working in.
The challenge for growth in a Mom and Pop operation is nepotism. Many people put their children in charge of the business, even though their children may be incompetent, because blood is thicker than water. Often the children don't share the passion for the business that their parents had or they don't have the entrepreneurial drive to lead the business.
A franchise, such as McDonald's, is in theory a turnkey operation. The entrepreneur sells a ready-made business to a person who does not want to go through the creative and development phase of starting a business. It's like being an instant entrepreneur. One advantage to some franchises is that banks are more inclined to lend money to someone who wants to buy a franchise than to a person who wants to start a business from scratch. The banks are more comfortable with the successful track record of other similar franchises and the banks value the mentoring programs that most franchises have to assist the new entrepreneur.
One of the biggest problems with big-name franchises is that they are generally more expensive to get into and have little flexibility for a want-to-be entrepreneur. Franchises are the type of businesses that typically face legal issues and often end up in court. These fights are some of the most vicious fights in the business world.
Reportedly one of the main reasons for fighting is that people who buy a franchise business do not want to run it the way the franchisor, the person who created the business, wants them to run it. Another reason is if the franchise does not do well financially, the franchisee wants to blame the franchisor for the lack of business success. If you do not want to follow the directions of the franchisor to a tee, it is best you design, create, and start your own business.
Network Marketing and Direct Sales
The network marketing and direct sales industry is recognized by many to be the fastest-growing business model in the world today. It is also the most controversial. Many people still have a negative reaction, claiming that many network marketing organizations are pyramid schemes. Yet in reality, the biggest pyramid scheme in the world is the traditional big business corporation, with one person at the top and all the workers below.
Everyone who wants to be an entrepreneur should take a look at a network marketing business. Some of the biggest Fortune 500 companies, such as CitiBank, Avon, Levis, and Smith Barney, distribute their products through a network marketing or direct sales system.
We are not members of any one network marketing or direct marketing business, but we do speak favorably of the industry. People who want to be entrepreneurs should consider joining one of these businesses before they quit their jobs. Why? Many of these companies provide essential sales, businessbuilding, and leadership skills not found anywhere else. One of the most valuable benefits from associating with a reputable organization is that it teaches the mind-set as well as the courage required to become an entrepreneur. You will also become more familiar with the systems required to build a successful business. The entry fee is typically quite reasonable and the education can be priceless. (To further explain the educational value of such types of business, we wrote a small book entitled The Business School: For People Who Like Helping People [Warner Books]. For more information on this book, please go to our website, www.Richdad.com.)
If I were starting my entrepreneurial career all over again, I would start with a network marketing or direct sales business, not for the money but for the real world business training I could receive, training similar to the type of training my rich dad gave me.
One of the more interesting discussions Mike and I had with rich dad involved the subject of entrepreneurs stealing from other entrepreneurs. Rich dad used an accountant working for an accounting firm as an example. One day the accountant, who was an employee of the firm, resigned and started his own business with clients he met while an employee of the firm. In other words, the accountant walked out the firm's door, but took the business with him. Rich dad said, "While this may not be illegal, it still is stealing." While this is one type of business design, it is definitely not the kind of entrepreneur he wanted his son and me to be.
The type of entrepreneur he wanted us to be was a creative entrepreneur like Thomas Edison, Walt Disney, or Steven Jobs. Rich dad said, "It is easy to be a small entrepreneur, like a Mom and Pop sandwich shop. It is also relatively easy to be an entrepreneur in a trade or a profession, such as a plumber or dentist. Also it is easy to be a competitive entrepreneur, someone who sees a good idea, copies the idea, and then competes against the entrepreneur who created the idea." (In the Rich Dad's Advisors book Protecting Your #1 Asset [Warner Books], Michael Lechter refers to this type of competitor as "spoilers" and "pirates.") This is what happened to me when I pioneered the nylon and Velcro wallet business. Once we created the market and the awareness of this new product line, competitors came out of the woodwork and my little business was squashed. Of course I cannot blame them. I can only blame myself because once again, I designed the business poorly before there was a business.
Even though I took a pounding, rich dad was happy that I was learning to be a creative entrepreneur, rather than a competitive one. He said, "Some entrepreneurs win by creating. Other entrepreneurs win by copying and competing." He also said, "The riskiest of all types of entrepreneur is the creative entrepreneur, also known as an innovator."
"Why is the creative entrepreneur the riskiest type to be?" I asked. "Because being creative means you are often a pioneer. It is easy to copy a successful and proven product. It is also less risky. If you learn to innovate, create, or invent your way to success, you are an entrepreneur creating new value rather than an entrepreneur who wins by copying."
Public and Private
The vast majority of businesses large and small are private companies. A large private company is often referred to as a closely held company. That generally means a company owned by just a few owners, and ownership interests are not available to the public at large.
A public company is a company that sells shares of the business to the public at large, most often through stockbrokers and other licensed securities dealers. A public company sells its shares on a stock exchange like the New York Stock Exchange and operates under much more stringent rules than private companies.
Rich dad never formed a public company, yet he recommended that Mike and I create one, as part of our development as entrepreneurs. In 1996, at the same time we were forming The Rich Dad Company, I was also an investor and involved in forming three public companies. One company was created to explore for oil, one for gold, and one for silver. The oil company failed even though it struck oil, which is a story in itself. The gold and silver companies did find substantial amounts of the gold and silver they were looking for. Although the oil company failed, the gold and silver companies made the investors a lot of money.
Working on developing the public companies was a great experience. As rich dad suggested, I learned a lot and became a better entrepreneur in the process. I found out that the rules are a lot tougher for a public company, that a public company is actually two different companies serving two different customers-the real customers and the investors-as well as serving two bosses, the board of directors and the government securities agency, such as the SEC, the Securities Exchange Commission. I also found out about tougher accounting standards and tougher reporting standards.
When I was first starting out as an entrepreneur, rich dad said, "The dream of many entrepreneurs is to see the company they formed listed on the stock exchange." Yet, after the Enron, Arthur Anderson, Worldcom, and Martha Stewart scandals the rules became tighter and the compliance requirements much more complicated and expensive. The government was breathing down public companies' backs. Building a public company business wasn't as much fun as I had expected. Even though I learned a lot, made myself and our investors a lot of money, became a better entrepreneur, learned how to design a public company, and was glad I went through the learning process, I doubt if I will ever form a public company again. That type of business is for a different type of entrepreneur. I can make more money and have more fun in small closely held private businesses. (If you are interested in more information on the pros and cons of private businesses and public companies we recommend the Rich Dad's Advisors book OPM Other People's Money, by Michael Lechter (Warner Business Books, 2005).
Can Anyone Be an Entrepreneur?
Rich dad wanted his son and me to understand that anyone could be an entrepreneur. Being an entrepreneur was not that special. He did not want the idea of being an entrepreneur to go to our heads. He did not want us looking down on anyone or thinking we were better than other people if we became successful entrepreneurs.
To this he said, "Anyone can be an entrepreneur. Your neighborhood babysitter is an entrepreneur. So was Henry Ford, founder of the Ford Motor Company. Anyone with a little initiative can be an entrepreneur. So don't think entrepreneurs are special or better than other people. Your job is to decide which entrepreneur you most want to be like-the babysitter or Henry Ford? They both provide a valuable product or service. Both are important to their customers. Yet they operate in very different spectrums, different bandwidths of entrepreneurship. It's like the difference between sandlot football, high school football, college football, and professional football."
With that example, I understood the point rich dad was making. When I was in college in New York, playing college football, our team had the opportunity to practice with a few players from a professional football team, the New York Jets. It was a very humbling experience. It was soon obvious to all of us on the college football team that while we played the same game as the pro players, we were playing it at a completely different level of play.
As a linebacker, my first rude awakening was trying to tackle a New York Jets running back coming through the line. I doubt if he even knew I hit him. He ran right over me. It felt like I was trying to tackle a charging rhino. I did not hurt him but he definitely hurt me. That running back and I were about the same size. But after trying to tackle him, I realized the difference was not physical. It was spiritual. He had the heart, the desire, and gift of natural talent to be a great player.
The lesson I learned that day is that we both played the same game, but we were not playing at the same level of play. The same is true in the business world and the game of entrepreneurship. We can all be entrepreneurs. Being an entrepreneur is not that big a deal. A better question to be asked in designing a business is, "At what level of play do you want to play the game?"
Today, older and wiser, I do not have illusions that I would ever be as great an entrepreneur as Thomas Edison, Henry Ford, Steven Jobs, or Walt Disney. Yet I can still learn from them and use them as mentors and role models. And that is rich dad's entrepreneurial lesson #1: "A successful business is created before there is a business."
The most important job of an entrepreneur is to design the business before there is a business.
Laying the Foundation for Success-Design the Business
Most new entrepreneurs get excited about a new product or an opportunity they think will make them rich. Unfortunately, many of them focus on the product or opportunity rather than invest the time designing the business around the product or opportunity. Before quitting your job, it might be a good idea to study the lives of entrepreneurs and the different types of businesses they created. Also you might want to find a mentor who has been an entrepreneur. All too often, people ask business advice from people who have business experience as an employee but not as an entrepreneur.
Later in this book, we will introduce the B-I Triangle, which outlines what components are required to create any business, regardless if it is big or small, franchise or individually owned, Mom and Pop or publicly owned. Once a person understands the different components that make up a business it becomes much easier to design businesses as well as evaluate good ones and bad ones.
Also, we always recommend keeping your daytime job while starting a part-time business-not for the money but for the experience. That means, even if your part-time business does not make any money, you are gaining something far more important than money-real life experience. Not only will you learn about business, you will learn a lot about yourself.
One of the reasons for the success of The Rich Dad Company was that the business was started by three already successful entrepreneurs, Sharon, Kim, and me. Each of us brought our own experiences and perspectives to the team. Sharon came from the background of the proverbial A student, a certified public accountant who had migrated into the realm of entrepreneurship. She had started and grown several companies of her own prior to starting The Rich Dad Company with Kim and me. As a bonus for you, Sharon will provide her unique perspective and will share her own insights and experiences related to each lesson.
Lesson #1: A Successful Business Is Created
Before There Is a Business.
The path to entrepreneurship is like a trek through the wilderness. If you want to survive and successfully reach your destination you must prepare beforehand. Before you go hiking through the woods, you pack carefully to make sure that you have all of the things you need to survive the trip. You think about the obstacles and dangers that you are likely to encounter. You check the weather report. You make sure you bring the right clothing, equipment, food, and water. The journey into entrepreneurship requires the same sort of careful planning. What preparation is necessary to put yourself in the best position to succeed?
You start by being sure that you have the right mind-set-that you think like an entrepreneur instead of an employee.
You do your homework-study the market, your target customers, and the competition.
You identify the skills needed for a successful business in that market, and assemble a team of coventurers and advisors that provide the skills you need.
You identify some advantage over the competition and ways to distinguish yourself from them in the minds of potential customers.
You put together a business plan mapping out your route to success.
You lay the proper legal foundation for your business. What do we mean by legal foundation? Here are some examples:
You choose a form of legal entity for the business that provides the best limitation of liability and minimizes taxes (refer to Garrett Sutton's Rich Dad Advisor book Own Your Own Corporation, Warner Books).
You obtain all necessary licenses and permits, making sure that clear and complete written agreements are in place to avoid any future misunderstandings.
You put the appropriate legal protections in place so that you can sustain your competitive advantage. As my husband, Michael Lechter, puts it: You build a fort around your intellectual property so that you can fight off the spoilers and pirates among your competitors (refer to Michael's Rich Dad Advisor book Protecting Your #1 Asset, Warner Books).
ENTREPRENEUR VERSUS EMPLOYEE
What are the characteristics of an entrepreneur? How does an entrepreneur differ from someone with an employee mentality? Certainly, a willingness to take calculated risks is one element. Another element is a willingness to fly in the face of conventional wisdom. As Michael also likes to say, an entrepreneur will "suspend disbelief " and try something even when all the people around him or her say that it can't be done.
However, from my perspective, the defining characteristics of true entrepreneurs are creativity and the ability to accomplish things beyond their own resources. They are masters at solving problems, converting those problems into valuable intellectual property, then leveraging the intellectual property into a business. They are masters at using other people's money and other people's resources. An entrepreneur's mantra is, "Let's figure out how we can do it," and never are heard the discouraging words, "We can't do it," or, "We can't afford it."
Create a Business or Buy a Business?
I can't tell you how many people tell us that they want to start their own business. Most often the conversation goes something like:
"Sharon, I am so excited about starting my own business," Susan says.
I reply, "Wonderful, what type of business are you interested in?" Without hesitation Susan answers, "I want a business that provides good cash flow and that my employees can run, so I have a lot of free time to spend with my family. Oh, and I don't want to have to pay a lot for it."
At this point, I know that Susan is not really an entrepreneur and may not be able to become one. She truly does not understand the commitment required to build a successful business. Her comments, "I don't want to have to pay a lot for it," and, "I want a business that provides a good cash flow," tell me that she really wants to acquire a business that has already been built by a successful entrepreneur. The value has already been created by the seller. The seller is entitled to compensation from Susan for the value created. She will have to pay for that existing value. In this case, unless Susan knows how and is able to take this business to the next level or knows how to enter a new market, she is buying a job, not creating a business.
There is a big difference between being an entrepreneur who creates and builds a business and buying a business. In the example with Susan, it is clear that she wants to "buy" a business, not "create" a business.
There is nothing wrong with buying a business. However, it is CREATION that energizes an entrepreneur. To build a business from nothing that is successful, creates value, and is sustainable is the true goal of an entrepreneur. It is the CREATION part that provides maximum leverage and sometimes essentially infinite return on investment. When you buy someone else's creation, typically they, not you, achieve the leverage. Of course, that does not mean that the acquisition of an existing business is "wrong," particularly if you are bringing in additional talent or something to the table to take the business to the next level, or when the acquired business is only one component of a larger plan.
For example, the purchase of a franchise is not the "end game" for a true entrepreneur. A franchise may well be a great stepping stone-a source of education for an entrepreneur-but there is typically little room in a franchise for entrepreneurship and entrepreneurial efforts. When someone (the franchisee) buys a franchise, he or she is buying the right to use goodwill and business systems that have already been developed in connection with someone else's (the franchisor's) business (and sometimes the right to participate in collective marketing or purchasing programs). One advantage of a franchise business is that it has immediate credibility (with, for example, lenders) because the systems have already been tested and proven to work by the franchisor. (Of course, in order for the franchise to be successful, the franchisee must contribute significant efforts.)
However, consistency from franchise to franchise is one of the primary factors that makes franchising viable. In fact, the franchisor is, as a matter of law, required to control the way the franchise does business, or the franchisor will lose valuable rights. While there are some franchisors that will agree to adopt suggestions from their franchisees, it is the franchisor that makes the ultimate decisions. This tends to leave very little room for creativity on the part of the franchisee, and can sometimes be stifling to his or her entrepreneurial spirit.
From a Franchisor
With all of our franchises over the years I have noticed that there are four big-picture issues. Understanding the relationship among these four issues is what I focus on in training new franchisees.
1. Words: What words drive the way our franchise is heading? How do I greet my customers? How do I sell to the customer? What words are used to conduct the business and establish its culture?
The Words in and of a business always tell you a story.
2. Numbers: What numbers do I use to test the words that I'm using? Sales talk and blue sky floats by. How much time, how many sales leads, what is the cost, can I measure the in- and outflows of my cash?
The Numbers measure the franchise story.
3. Symbols: What are the symbols that I want the world to see representing the business?
Words, numbers, and/or pictures can be symbols, logos, uniforms, people-anything that leverages who and what your franchise is.
Symbols leverage your franchise story.
4. Focused action: This is the driver of all franchise and business stories. This is what makes or breaks any business. What am I doing? No matter what you are doing, it will work for you or against you in building your franchise.
I have come up with a formula that I use in all the businesses that I design to combine the impact of these four issues:
(Words + numbers) _symbols / focus
The bottom line is that a franchisee must focus on the established
business systems, including what words they use, how their numbers
perform, and the symbols they use in order to reach their greatest
success in the franchise. One of the greatest benefits of buying a franchise
is that the franchisor has already established the successful
track record of the business system.
Franchise Control Systems
Create a Business or Create a Job?
Robert talks about the self-employed entrepreneur who builds a small business around him- or herself. This is probably an entrepreneur who owns a job, not a business. Rich dad has a rule of thumb about this distinction between a job and a business. If you can leave your business for a year and come back and find it stronger and bigger, you have created a big business, a B quadrant business. If you cannot, you may have created a job, or an S quadrant small business. For example, many lawyers or accountants become so successful that their clients only want to do business with them. The more successful they become, the less time they have. They own a job, not a business. There's a distinct difference between the two.
This is not to say that you cannot build a business around your expertise and creativity. You simply have to find a way to leverage your expertise and creativity-create systems that let others (your employees or coventurers) apply your expertise and creativity.
WHAT IS YOUR PERSONAL REASON FOR STARTING A BUSINESS?
As we begin this book about becoming an entrepreneur, it is important to understand your personal motivation for wanting to build a business. Ask yourself the following questions:
1. Why do I want to own my own business?
2. How badly do I want to own my own business?
3. At what level of play do I want to play the game?
4. At what level of play am I willing to extend myself to play the game?
5. Am I willing to spend the time to learn about other successful entrepreneurs and their businesses?
6. Am I afraid to fail?
7. Can I turn my fear of failing into a strength that will help me drive the business?
8. Can I learn from my mistakes?
9. Can I build a team, or do I like to work by myself?
10. Am I willing to pay the price?
11. Am I willing to put in the time now to be rewarded later?
12. Am I willing to delay financial rewards until the business succeeds, or do I need a paycheck?
As you are answering these questions, if you are still determined to start a business, take it one step further and ask yourself the following questions:
What have been your greatest successes?
What have been your greatest failures?
How many times have you worked for free?
Would you work for this company even if you were not paid?
Are your family and friends emotionally supportive of your efforts in this venture?
Are you willing to educate yourself in all the areas of the B-I Triangle (essential components of a successful business-to be discussed and reviewed throughout this book)?
If after answering all of these questions you are still eager to become an entrepreneur, you may have just what it takes to be a very successful entrepreneur. Congratulations for seeking freedom!
Excerpted from Rich Dad's Before You Quit Your Job , by Robert T. Kiyosaki and Sharon L. Lechter C.P.A. . Copyright (c) 2005 by Robert T. Kiyosaki and Sharon L. Lechter C.P.A. . Reprinted by permission of Little, Brown and Company, New York, NY. All rights reserved.Back to top