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?"
Self-Employed 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 best educated 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
self-employed entrepreneur and a big-business entrepreneur was that many
self-employed 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 Trades People
He also wanted us to know that many professional people such as doctors,
lawyers, accountants, architects, plumbers, and electricians started a
self-employed 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 self-employed
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.
Franchises
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, business building, 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.
|
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"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 best educated
person in your business." |
Legal Thieves
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.
Creative Entrepreneurs
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.
Page 4: Laying the Foundation for Success-Design the Business
