Suggestions for someone on the verge of starting a small business

October 26, 2006 9:12 PM

I'm thinking of starting a small business - should I do it?

I've been a graphic designer, then web designer, for the last twelve years. Over the last five years my salary has plateaued at about $40K, with not much chance of growth.

Almost exactly a year ago, I decided to get serious about freelance after puttering around with it for years. I've made about $25K in freelance income (pre-tax) over the last twelve months, doing the work in the evenings and weekends.

I think I'd be able to replace my current salary if I went out on my own, but I know there are a lot of startup equipment costs and office rent that would cut into that. Without accounting for startup costs, I have enough money saved to last six months with no income. Counting a bare minimum of startup costs, I have enough for maybe four months. I'm also considering starting by working out of my home, although I don't want to think too small, and my home is not ideal for meeting clients (they would have to walk through most of the house to get to the office).

I know that my salary is too low for the work I do, and I am interviewing for other jobs (going to an interview tomorrow, actually). Unfortunately, the area I live has a deadly combo of extremely high cost-of-living and extremely low wages, so I don't think a much higher-paying job is out there. Combine that with a desire to have more independence and a bigger cut of profits, and I'm wondering if going out on my own is a good idea.

There are a lot of graphic design companies in the area, at least four major and who knows how many smaller companies and freelancers. There are two major web design companies in town, one doing very good work, one doing average stuff. I've been pricing myself much lower than the competition, but I know that would have to change at least some as my costs went up.

Basically, I think I'm afraid to make the leap, and I want to hear from other people that have tried it. Did it work, why did it work, and if it failed, why it failed. Anyone fail at it and then re-join the salary ranks? Any suggestions for easing the financial transition? Is a home office a good way to start, or is an external office a better idea? General suggestions?

posted by letitrain to work & money (23 answers total)

A home office is a perfect way to start, if you won't need to bring clients in. You can also rent conference rooms by the day/hour is necessary or do meetings over lunch. Of course, this is only good if you can consistently get the contracts, which you seem to be doing just fine. Moving to a lower cost area might help stretch your budget inthe meantime, btw.
posted by IronLizard at 9:30 PM on October 26, 2006

I am doing my own business from home and it has worked for me pretty well. Save up lots of cash (I had enough to buy all the equipment and had a years worth of living expense money) avoid putting too much on credit cards and make sure you know the business inside out. You sound like you are already most of the way there.
posted by Iron Rat at 9:43 PM on October 26, 2006

Meeting clients has been for the most part OK. Right now I usually just go to their office, bringing a laptop as necessary. I don't mind working at home, but I'm afraid of appearing too small-time to attract larger clients.

I have been getting contracts fairly easily and well-spaced, all through references from friends and previous clients. It makes me leery that it's a little too easy... that once I quit my day job, I won't get another contract for six months.
posted by letitrain at 9:44 PM on October 26, 2006

It sounds like you are well positioned to go out on your own. Don't blow money on office space, at least not yet. You might be able to find someone with extra space who is willing to let you use an office or meeting room occasionally for a reasonable price, and some town have business centers where you can rent space on short notice as needed. In addition, a lot of clients will appreciate it if you come to them (but be careful how you set expectations, you don't to spend too much time travelling to meetings when you could be doing billiable work.

Instead of office space, put your money towards the equipment you need to be productive, and save the rest to build up your cushion.

This is important, because it's time for you to stop competing on price. You need to work up to near-market rates with your existing clients, and bring new clients on at market rate.

I know quite a few people who have gone out on their own doing design work. Some of them have gone back to working a job, and didn't have much difficulty finding one, but just as many have stayed independent. The ones who stayed independent are the ones who were able to put money away during good times and budget for lean times, so they didn't have to freak out when work slowed down.
posted by Good Brain at 9:52 PM on October 26, 2006

I consult privately in an entirely different field, and there are alot of good things about it.

* Almost complete control of my own schedule.
* (No dress code.)
* Better pay
* Working at home
* [insert favorite work for yourself /work at home reason here]

But there are alot of things about it that most people don't consider.

* It's lonely working at home by yourself at home. Office friendships count for alot of breaking down the drugery of work.
* Work is always there. You can never leave work because you are responsible for everything. Never.
* Friends and family often think that since you are your own boss / work at home that your job is not really a job or easy that you can just blow it off. "You don't really work (eyeroll)"
* No benefits or vacations
* Taxes. Taxes really really really really suck. Taxes Suck.
posted by bigmusic at 10:00 PM on October 26, 2006 [1 favorite]

I opened my own law office about a year ago. The good news is that I have made more in the last year than I ever made at a job working for someone else. The bad news is that being your own employer presents problems that you may never have thought about when working for someone else. The stress level, for one thing, is about ten times now what it ever was when I worked for someone else. The financial and administrative challenges (keeping track of money, paying taxes, budgeting for office expenses that you've never had to worry about before) are significant.

I think the biggest pitfall for a new small business owner is not charging what your services are worth. Don't fall into the trap of being so delighted that someone is considering hiring you, that you undervalue your services. I find that, as a fledgling "professional service firm," it's easy to sell yourself too cheaply. You feel guilty quoting a higher fee --- you don't want to seem greedy to the client; you may doubt whether you're worth the higher fee; you want to undercut the competition; and you'll bend over backward to seal the deal with this prospective client. I think it all comes down to the fact that, being new to running a professional service firm, you do not realize how much your services are worth.

And a corollary problem is promising the world to a client, but not ensuring that you will be paid for every single thing you do. I have fallen into the trap before of promising a bunch of seemingly-insignificant things to people, as part of a negotiated flat fee, that actually turn out to be huge time drains. Do not be shy about making sure you will be paid for everything you do.

I have learned the hard way that low fees aren't doing anybody any favors --- the client or you. If you charge a super-low fee, you may make the client happy at first, but you may very well end up screwing the client in the end because you've got to take on a lot of other work to make up for the fact that you are charging individual clients very low fees. So you may excel at attracting clients, but you're doing crappy work for them. You're too busy to return their phone calls promptly, you don't return their phone calls at all, etc. You piss them off, and they never return. It is so easy for these bad things to happen when you take on too much work, which is precisely what you will do if you charge low fees. That's no way to build a practice.

Even though I know this, I still find it hard to quote fees I think are fair to me. For example, I had a client come in today, who had done business in the past with some much larger, heavy-hitter firms in my city. Even though I was charging significantly less than those heavy-hitter firms charged per hour, I still felt guilty charging this client what I thought was fair. But when I think about everything that goes into providing legal services (efforts and resources that, largely, take place out of the client's view --- so they may question the fairness of the fees), larger fees are fair. The necessity of charging for every penny I am worth has been a hard lesson to learn, for me at least.
posted by jayder at 10:23 PM on October 26, 2006 [1 favorite]

Thanks for the advice on pricing, Good Brain and jayder. I've been charging what I believe is about half to two-thirds the going rate. I think my reasoning for the rate discount is wanting to get more work, but also a way of making up for the inconveniences of working with a freelancer who is also working full-time. For example, they often cannot reach me in the middle of the workday to discuss a project, and mid-week meetings are hard to schedule.

I'll be much more available if I go out on my own, so I won't feel the need to discount for the inconvenience, but I'll be much more worried about getting enough work.
posted by letitrain at 10:44 PM on October 26, 2006

If you're planning to go out on your own, you're going to need to raise prices when you do so. You'll have more costs to cover and you won't have the security of your day job. I would suggest raising prices for new customers before you quit your job. Otherwise, you may quit and find that people don't want to hire you at your new rate.

Can you cut back to part-time at your job? Can you get a second job elsewhere? Until you work things out, it can be helpful to have a second income to give you some routine, income and security.

Also, $40k seems very low for an experienced designer. Do you really want to go the consulting/freelance route or are you looking for ways to increase your income?
posted by acoutu at 10:58 PM on October 26, 2006

I consult in this field currently, after working on staff for two decades. I consulted on and off prior to that as well. I'm currently doing it for the work|life flexibility; I wanted to be able to volunteer days at my son's school. I run out of a home office as my clients are largely out of the area anyway and why commute if one doesn't have to? The rare times I meet with a client, I visit their office.

The pluses have been well covered, here's a few additional things to consider:

Contracts. Make sure you have one for your client to sign spelling out scope of work, payment, liability. The Pricing & Ethical Guidelines handbook has some boilerplate contracts you can adapt if you don't have anything you're currently using. Bigger clients will often have contracts they want you to sign: if you see something you're not sure about, talk about it with them before you sign.

At various times, the growth in your work will plateau as the projects you land will often be very similar to projects you've already done (i.e. new client looks at your book, sees that you've done lots of brochures, is OK with having you do a brochure for him but isn't quite willing to chance you on say...his product packaging. Or his corporate identity redo). Your success at breaking out of these ruts is entirely dependent upon your ability to sell yourself. Unless you're completely happy with the sort of work you are doing now, strive to land at least one 'stretch' project a quarter.

You'll be your own boss, yay! But you'll also be your own IT department, your own administrative assistant, your own proofreader, your own receptionist, your own accountant, your own sales staff, your own customer service rep, your own janitor. The overhead of doing these tasks will eat into your design time, if not managed well you'll find yourself going crazy doing everything *but* design. Outsource where possible and as soon as you can afford it.

Your ISP's reliability and speed will suddenly become more important to you than you ever thought possible.

It can become easy to not stay current with what's out there, and lacking colleagues can result in having the echo chamber effect on your design. Try to find a group of people whose objectivity you can trust for the occasional reality check on your work and just for the creative joy of brainstorming sessions. I trade time with some fellow consultants for this service, it's also not a bad practice to maintain contacts with other local designers in case you get swamped with work and need help.

Brace yourself for a lot of freebie work requests, everything from clients who want a cut-rate in exchange "for exposure", non-profits hoping for pro-bono work, friends looking for favors. Do what you feel comfortable doing but do set some limits: x hours of pro bono/quarter in exchange for documentation of charitable contribution, for example.

Schedule vacation times for yourself, let your clients know well in advance. It's very easy to just work work work and never give yourself a break.
posted by jamaro at 11:03 PM on October 26, 2006 [1 favorite]

Can you cut back to part-time at your job? Can you get a second job elsewhere?

I doubt my boss will want to allow me to go to part-time to establish a business that will compete directly with his. He knows I freelance, and we get along well, but not that well. I may be able to get a second job, but I'm hoping to completely concentrate on my own business to see if I can make it work.

Also, $40k seems very low for an experienced designer. Do you really want to go the consulting/freelance route or are you looking for ways to increase your income?

Yes, $40K is a low salary for my field and experience level. I'm sure there are some jobs in the area that pay more, but I haven't found them. I've been to several interviews in the last six months, and been offered the job in all but one. I turned them down because the salary is, you guessed it, $40K. I don't want to change for change's sake.

My primary motivation is money. I feel like I can handle the responsibility and work, and I'd like to get more profit from my work. More than anything, I see no future in working for someone else.
posted by letitrain at 11:18 PM on October 26, 2006

It sounds like you're in an ideal position to make the move, with savings and existing clients, but it worries me a little when you say "My primary motivation is money." Of course you want to be paid for your skills, but working for yourself is a lot more fun when you're driven by enthusiasm, the urge to do new things, maybe a rebellious nature, etc.

Would you ever consider going it alone if money wasn't an issue? If not, then I reckon you're perhaps better off sticking with a day job and doing some research into how you can adapt your skills and/or job-hunting to find a better salary.
posted by malevolent at 12:42 AM on October 27, 2006

I have run my own business as a web designer/developer for about ten years, and have had amazing years (thank you dot com bubble) and middling years, but even the worst year was more than my previous salary, which was considerably more than yours, even in 1995.

Be good, charge enough, get contracts, and you'll find word of mouth is by far the most valuable commodity. I find money a huge motivator, so that's not all bad.
posted by maxwelton at 1:46 AM on October 27, 2006

Oh, yeah: One solution to taxes is incorporating. There is a paperwork hassle, and you'll be paying for some professional accounting services, but your taxes will be slashed from what you pay as a sole proprietor.
posted by maxwelton at 1:48 AM on October 27, 2006 [2 favorites]

I concur with Malevolent

To go out on your own and to swallow all the negative aspects of such a move takes more then just the motivation of money. To be a small business owner requires the drives mal mentioned and many more, incdluding but not limited to a constant desire to improve, an erge to beat the competition and such.

Maybe you have those desires, I'm not sure. Any direction you go, good luck!
posted by crewshell at 2:45 AM on October 27, 2006

I'm running a web application development firm, but I have a partner (which I found invaluable, since we planned on growing out dramatically) and this is how I put it to one of my employees:

It's a lot of stress and working on always scoring new clients and dealing with overhead and pricing appropriately to not eat it with margins and dealing with profit and loss statements and looking at office space and hiring people on full time and paying fica and unemployment and workman's comp and benefits like healthcare and accounting and taxes and business cards and a web presence and phone and servers and more clients and networking with people and invoicing and depositing and cutting checks and communicating and following up with *every* potential lead and always selling, and etc.

There are a lot of things there that apply to a freelancer, and a few that don't. The point is, you're going to eat it on taxes and health care, and you'll find that some stress elements will be higher, but the fact that you're doing it for you will make you ridiculously happy. Making yourself rich is always better than working damn hard to make someone else rich. And $40k is horrible, and I'm saying this as an employer in the field in Phoenix. Seriously.

As for clients/office, we've had a few major clients, and our office is nothing to sneeze at (it's a sublet from one of said major clients), but before that, we just always went to the clients. There's nothing unusual about it, and they find it far more convenient and appreciate it.

I'd avoid the common stupidity of putting "CEO/President/Owner/Chief of Awesome" on my business cards; we always settled for "Lead Developer." Seeing "CEO" on a card always screams "tiny tiny company."

The pipeline will be your best friend and your most hated enemy. Make sure you always have leads in the pipeline. Look for groups that focus on building local businesses, and other opportunities to network; especially those that don't have a web presence in them. Start in a concentrated group that might be able to use your services, and treat them well, and watch what word of mouth can do.

Keep your costs low. Lower. LOWer. That's right. When we first started, we put exactly $100 each into the bank account. And we spent basically nothing. We were fortunate enough to be "gifted" a colocated/rented server with a small number of existing clients on it that covered its cost, so that was lucky for us. Spend some money on business cards. Build your own site up nicely. And that's about it. Change your voicemail and use your existing cell phone.

Form an LLC so that you're somewhat protected from the slew of ridiculous liabilities being in business forms. (This should cost very little and does NOT require a lawyer, though single-person LLC's are sometimes frowned upon; Google "forming an LLC in california" to see what comes up. It's usually a form or two, a name check with the state corporation commission and a legal publication in the newspaper. But you're in Cali, which means there will probably be other hoops to jump though, like declaring that the state of California has found that computers and the internet can cause cancer in mammals, etc.)

Malevolent makes a perfect point—money CANNOT be your only motivating factor. Because you will be beaten and worn down. Because working for yourself is DAMN hard. Because there isn't any security in it, and you can make stupid mistakes that you and only you get to pay for. And because it's not nearly as much fun if you're not also doing it to kick ass and be successful and build your OWN success. The money comes with it, but only when you're passionate about what you do and absolutely LOVE to prove yourself and, again, kick ass.

Don't worry about accounting, or incorporating, at least as an S-Corp or C-Corp. An S-Corp might be an option at some point, but not right yet. An LLC gives you the flexibility of being taxed as either an S-Corp or a partnership/sole proprietorship, so that's cool. All income for the business flows downstream to you, and you'll be paying self-employment taxes of 15% and your regular income tax. You'll be doing this annually (or, if you're smart, quarterly) and it'll suck. You *do* want to look at an accountant to help you out at that time—mine cost $150 for my personal taxes, and he saved me over $2200. Well worth it. I doubt TaxCut Pro would've helped as much.

Keep good records, and consider Quickbooks, but you don't need it yet.

Don't waste money advertising. You're not there yet. Word of mouth is it, and networking is even MORE it. Identify events in the area that you can jump into and meet people. Always ask what they do, recognize it, be interested, and let slip that you develop web sites. Ask if they have one, etc. Have a card available. Have a web site that's great. See if you can get them to say "oh, I've always needed a site" or "I need my site redesigned."

If they say those magic words, grab their contact information, and then FOLLOW UP within a week. And then again, within two weeks. You'll make the sale if you have a decent enough portfolio, but if you can talk the talk, you'll find a surprisingly high number of times, people will trust you.

Be honest, be good and charge appropriately. Explain, if and ONLY if the customer balks at your price, that you get what you pay for.

Do NOT lower your price to make a sale. This will leave them wondering how much lower they could've gone, and what you really value yourself at. If you want to make a concession to seal a deal, do so in features. "Well, we can cut the price a bit here, but we won't be able to provide option (a)."

NEVER say "oh, yeah, we can do $50 an hour." Because instantly, they'll be thinking that "$75 an hour is our sucker price." You're better than that, and you HAVE to believe that, because that's what will make THEM believe it. It helps if your work quality doesn't suck, but when you attach a value to something, and you speak about it confidently and masterfully, they'll feel BETTER about paying more. There's a certain sense of satisfaction that comes with paying just a bit more to get a MUCH better product, and when you have your clients believing that's been the case with you, you've done right.

Good luck. It's fun, hedonistic, insane and awesome. And there are never enough people offering these services, and more importantly, never enough people who NEED them. Network, network and network. Actively seek people out, be cordial, offer to consult for free, but design for the rate you're truly worth. Be honest, be friendly and reassure them that they're getting a kick ass product that will convert into dollars for them, because their web presence is so gorgeous and because that matters so much nowadays.

It's really as simple as that. :-)
posted by disillusioned at 2:49 AM on October 27, 2006 [4 favorites]

I'm not sure of the benefits/downsides of LLC vs. S-corp; I'm an S-corp and don't pay anywhere near the taxes I paid as a sole proprietor. Small businesses are not only about how you earn money but how you spend it.

The jobs that will make you slit your wrists are the jobs that you give a discount on "to be a nice guy" or thinking "I'll give them a bargain rate and in the future they'll use me for the big stuff."

Remember, if someone is struggling to pay you a heavily-discounted rate, they're going to be a huge pain in the butt because while you consider it grossly underpaid they'll consider it a huge expense, and their going to hassle you more than a big client will.

Give someone a bargain rate and you'll very rarely get them to pay you normally in the future. They have you down as the cheap guy. They'll look for "a real company" when it's time to the big stuff.

Finally, don't work for free. Ignore any potential job that insists you submit a sample design for their project. That's what your portfolio is for. It's unethical and you'll just see your work six months later, slightly warmed over by another designer.
posted by maxwelton at 3:42 AM on October 27, 2006 [1 favorite]

Excuse typos, I need bed.
posted by maxwelton at 3:43 AM on October 27, 2006

You seem well positioned to make the move, but I think you'd do yourself a favor to quit thinking that your rate has to be somehow related to your costs. Your rate is your rate and it is set by market forces in your area. Not having an office or something like that should have no impact on how much you feel you can charge.

In fact it goes in the other direction. Charge market value with some concession to being competitive and win contracts on your ability to sell and to deliver the best quality product. Then, use your revenue level to drive decisions about what level of additional costs you might be willing to add to the mix. Some of this will of course be influenced by the fact that some of these trappings may help you make a sale (or make life easier in other ways), and then the cost-benefit analysis takes over. But that still has little to do with what you'll charge.

The other thing - take a page from lawyers, who closely monitor their billable hours vs other working hours. As much as you can possibly do on someone else's dime is the goal while being scrupulously ethical about doing so.
posted by mikel at 6:43 AM on October 27, 2006

I think everyone should start their own business. I don't know if I'd recommend it being the SOLE source of income, but there are huge benefits to being your own boss, and diversifying your work life. I've done it, and won't ever go back, even though I get some nice full-time job offers from time to time.
posted by blue_beetle at 8:32 AM on October 27, 2006

Try to find your client before starting a home-based business (or any business, for that matter). If you can't, consider a loan to fund your first 2-3 months of expenses.

Don't forget to include your salary as an expense.
posted by catkins at 10:41 AM on October 27, 2006

My primary motivation is money, but there are definitely other reasons. I feel like I've learned enough working for other people that I can do the work without direction. I rarely get interference from my boss, and I deal directly with clients, go to meetings, etc.

The boss is often involved in getting leads (he is a true talent in this regard), the initial meeting and proposal writing. After that, I do the work. This is different than the other designers on staff, who need lots of art direction.

the fact that you're doing it for you will make you ridiculously happy

I've experienced a little of that feeling with the freelance work. It's a great feeling.
posted by letitrain at 11:29 AM on October 27, 2006

Avoid HELOC and Credit Cards: Get Small Business Administration guarenteed business loans: Smaller fees that are designed for what you're using them for. The podcasts at StartupNation.com are excellent for someone in your position, and also cover this SBA loan issue.

I am worried about the salary you've quoted. It sounds like you need to work on your branding of yourself or your negotiation. If bosses think you'll work for that, will customers give you much more?

And two words that will be your mantra: Business Plan, Business Plan, Business Plan.

Say them every morning, noon, and night until you have one your most critical friend approves of.

I went LLC myself. I like the ability to do non-service types of business, even though service based business can also be done. It's also the easiest to change how it works, and can be sold to a future S-Corp or C-Corp (including one you yourself make).

--Michael
posted by gte910h at 2:47 PM on October 28, 2006

I decided to start to blog this sort of thing after reading your question. I just started down your path (although I'm not particularly interested in selling services like I provide my current employer as you seem to be).

http://pitchtothegods.blogger.com

--Michael
posted by gte910h at 5:09 PM on October 28, 2006