Heed warning signs before starting a business

With Virginia's unemployment rate hovering at 6.9 percent, and the average length of joblessness dragging on for more than six months nationally, some talented jobless workers may consider becoming their own boss.

They might rationalize: "Well, it looks like I can't find a job. Maybe I should start my own business."

But should they - even if they have sizable savings and a handsome severance package to use as seed money?

Not so fast, cautions Tom Lawrence, president of FranNet of Greater Richmond, a franchise consulting firm in Henrico County.

Business ownership might be a good choice, he said. But it shouldn't be undertaken until people educate themselves about what they're getting into.

"Buying or starting a business as a last resort is never the right motivation," he said.

There are three warning signs that a person is embarking on a wrong-headed path, Lawrence said:

• They positively know what they want. "Our job is to simply ask, 'OK, tell me why that is what you want' - and then listen," he said. "If you hear, 'I think . . . .' Or 'I heard . . . .' Or 'I have always wanted . . . , ' the alarms should be going off," he said. You will quickly realize that they are charging forward on emotion. Too often, that charge leads to failure.

"What you should hear is," Lawrence said, " 'I've investigated and I have found I can afford it; the lifestyle it provides seems to coincide with what I want for me and my family; and I feel it gives me the opportunity to use my business and personal skills to good advantage.'"

Those considering going into business should document exactly what they are trying to achieve personally and professionally, Lawrence said. Then they should do a careful search for opportunities that are proven to provide those core values.

• They feel supremely confident. If they're not scared, they probably don't know enough, Lawrence said. If they've been successful, they probably cannot imagine not succeeding in everything they do.

But too much confidence increases the chance of failure, he said. "People who are overconfident tend to do less due diligence, are more likely to ignore a successful business model and will almost always downplay how hard it will be."

If they buy a business, they tend to spend too much, expand too soon and never consider that everything will not go right until reality sets in, he said.

• They say money is no object. If they have always succeeded, they cannot imagine their money running out, Lawrence said. "They have made money and are proud of it. The cost of an opportunity takes on too little importance, since they know they will succeed."

In reality, they should be able to produce a pro forma, a projection that includes not only revenue but also all the expenses involved in operating the business, he said. "The best way to get a pro forma is to ask people who have already done it."

If they cannot show this data, they are preparing for failure, he said.

Aspiring entrepreneurs should be able to answer these questions before embarking on a business venture, Lawrence said:

• How well is the industry holding up in this economy?

• What will be your total investment, including operating capital?

• How many people in that business have you talked with?

• How does the lifestyle inherent with this business match what you and your family want?

If they cannot answer those questions, they need to search for what else they need to know, Lawrence said.

Some people decide after performing their due diligence that starting a business is not for them, he said. The lifestyle might not suit what they want. They don't have enough capital. Or the business isn't what they thought it was.

The trick is to learn everything possible about a business, then be certain you have enough money to make it work, he said.

Contact Iris Taylor at (804) 649-6349 or . Follow her on Twitter at http://twitter.com/RTDIrisTaylor.