Legit Home Based Business

Is this the solution in "The New Economy"?

June 11, 2013

"What is a legit home based business that I can look into?" is a question that I am often asked as I travel around the country and run a consulting booth for our firm at Franchise Expo's here in the US.

As I consider my response I realize that it's not a question that has a hard and fast answer because there are so many variables that you need to take into consideration.

As an Entrepreneur, but also as a Coach and Consultant I have had the privilege of working with many types of businesses over the years. Traditional businesses, Franchises, Network Marketing & Multi-Level Marketing businesses and every type of home based business or direct sales company you can imagine. Over my 16 years as a coach and consultant I have also been asked to look at pretty much every opportunity that exists.

When considering becoming an entrepreneur there are a several important things that you need to take a very detailed look at and there have been many books written on that subject. Actually two that I highly recommend are The E-Myth by Michael Gerber and Financial Success: Ten Shortcuts to a Profitable Business by Jerry Pradier (I actually had the honor of writing the introduction to Jerry's book. He is a phenomenal business consultant and an amazing human being.)

My personal opinion is that a legit home based business is actually one of the best opportunities for someone to succeed in this economy. For the purposes of full disclosure I need to let you know that I have recently started working with a company that uses a hybrid of the business models that I will be discussing below and I will be talking more about that company and their products in the future. But for the purposes of this article, rather than talk about that business, I want to focus on what I have learned and have come to believe the benefits of owning a legit home based business are.

Let's talk about a few of the advantages and disadvantages of some of the current business models.

Traditional Business

Every year here in the United States 560,000 new businesses open. These statistics are based on the number of businesses that register themselves as a business entity. There are more than likely tens of thousands more smaller businesses and home based businesses that open who do not officially register and/or comply with the state and federal requirements that are not included in making up those statistics.

The other number that is reported in the US is the number of businesses that close each year. Any guesses? The number of businesses that close in the US annually is 530,000. 

Think about this for a moment. I did not say that these businesses were sold. I said that they closed. That means that someone more than likely took out a home equity loan, took out personal loans, maxed out their credit cards and borrowed money from friends and family to open their "dream business" and within a year because of many issues that we will discuss in detail later, they closed the doors on their business and lost all that they had invested.

These people started with the passion, the drive and the belief that they will succeed. But for many reasons mainly under capitalization or limited capacity they fail. It doesn't mean that they were bad business people. It just means that they were not prepared for what is involved in running a traditional business.

Franchise Business

To help people overcome the challenges that are faced when starting a traditional business, franchising was created as a vehicle to reduce the risk and increase the possibility of success for the new business owner and the parent company together. 

Franchising is at its most basic form, the practice of a new business owner using another person or company's successful business model. For the franchisor, the franchise is an alternative to the tremendous expense of expansion involved in building 'chain stores' to distribute goods and services. For the franshisor it also avoids the investments of time, capital, human resources and liability of a chain. The franchisor's success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

Essentially, and in terms of distribution, the franchisor is a supplier who allows an operator, or a franchisee, to use the supplier's trademark and and business systems to distribute the supplier's goods. In return, the operator pays the supplier a fee for those rights and systems.

Sounds good in theory. And for those who have business experience and the money to invest it can be a great opportunity for them. But not everyone has the money it takes to buy a franchise. The most recent numbers that I could find for Avg Start-up for franchises here in the US are from 2010.

  1. Subway (sandwiches and salads) | start-up costs $84,300 – $258,300 (22,000 partners worldwide in 2004).
  2. McDonald's | start-up costs in 2010, $995,900 – $1,842,700 (37,300 partners in 2010)
  3. 7-Eleven Inc. (convenience stores) |start-up costs in 2010 $40,500- $775,300, (28,200 partners in 2004)
  4. Hampton Inns & Suites (mid-price hotels) |start-up costs in 2010 $3,716,000 – $15,148,800
  5. Great Clips (hair salons) | start-up costs in 2010 $109,000 - $203,000
  6. H&R Block (tax preparation and now e-filing) | start-up costs $26,427 - $84,094 (11,200 partners in 2004)
  7. Dunkin' Donuts | start-up costs in 2010 $537,750 - $1,765,300
  8. Jani-King (commercial cleaning) | start-up costs $11,400 - $35,050, (11,000 partners worldwide in 2004)
  9. Servpro (insurance and disaster restoration and cleaning) | startup costs in 2010 $102,250 - $161,150
  10. MiniMarkets (convenience store and gas station) | start-up costs in 2010 $1,835,823 - $7,615,065

Along with the initial investment of a start-up a potential franchisee needs to have additional "liquid assets" to ensure that they and their families will be able to sustain themselves while the franchise is being built and until it becomes self sufficient. Remember that it could take several months from the time that the person purchases the franchise until they are officially "open for business".

Mid-sized franchises like restaurants, gasoline stations and trucking stations involve a substantial investment of capital as well as time. Unless you are a seasoned business owner who understands the finer points of owning a business a franchise will require the full the attention of its owner. To be successful many franchise owners show up before everyone else and are there after all other employees leave. As a franchise owner you are in essence "buying" a full time job.

Although the idea behind buying a franchise is that you will benefit from the experience, systems and support of the Franchisor. That is not always the case.

At a recent Franchise Expo I was approached by a gentleman who wanted to hire me as a consultant. As we spoke I learned that he already owned a franchise. He had invested approximately $200,000 and had had his operation running for a little over 2 years. I asked why he wanted to hire a consultant when he could get the support from his franchisor and his response was sadly one that I have heard several times from people who purchase franchises or do not do their research when looking at for a franchise or even a legit home based business.

He told me that he had been trying but could not get support from his franchisor. When he called them they would not return his calls and since they were based in another region geographically  the cost of going to their offices to get that support was prohibitive. 

You may think to yourself, "Wait a minute. He spent $200,000 on his franchise. How could buying a plane ticket be outside of his budget?"

I was surprised also. But as I asked more questions I discovered that what he was earning for his investment of $200,000 was approximately $1,500 a month!

Although buying a franchise is an option, just as with any business venture you need to do your research and find the one that is the right fit for you both financially and as a fit for the lifestyle that you desire. Are you looking for something that will require you to work 80 hour weeks? Or something more part time? What kind of return of investment are you looking for? And how quickly are you looking to make that return?

A Legit Home Based Business

When considering a legit home based business I should explain that the term home based business can apply to many different business models. You may want to become a dog walker or a nanny and develop a business around it. You may choose to start an Internet web site and generate money through advertising or selling affiliate products. You may consider joining a direct sales company or a network marketing company which is also known as multi-level marketing.

The reason I am referring to a legit home based business is because there is a distinction between a "business" and the formalities that go along with owning a business versus being self employed and working "off the books". 

A legit home based business will have specific guidelines that it needs to follow. It will have systems in place to allow it to operate as a business and you will pay taxes on those earnings.

One of the greatest benefits of a legit home based business is that it can be started at a fraction of the cost of a traditional business or a franchise. It can also be structured so you can work at it part-time or full-time depending on your needs and your abilities.

Having a legit home based business also has several other advantages over traditional businesses and franchises.You have more flexibility with your time. You have more opportunities for what kind of income that you will create for yourself. And as an individual, you have the tax advantages of being a business owner with a legit home based business that you do not have when you are working for someone else as an employee.

Things to think about when considering starting a legit home based business

One of the reasons that many people fail when they start a home based business is that they think that being an entrepreneur is easy. Again... refer to The E-Myth by Michael Gerber. In Michael's book he talks about how many people start their business because they have a hobby or skill that they are great at and have a dream of making money doing something that they love. What they do not consider and prepare for is that actually doing the thing they love is often a VERY SMALL part of running a legit home based business.

You have to consider marketing, accounting, hiring other people, managing those people, customer service, quality control, systems, tracking and the list goes on and on and on.

Another option that eliminates some of those obstacles is joining a direct sales company or a network marketing company. 

Network marketing is a business model that relies on a network of distributors to grow a business. Network marketing typically involves using four basic types of systematic strategies to make money:

  • Lead Generation: To locate new prospects;
  • Recruiting: Adding customers and/or business partners to your network; 
  • Retailing: Every legit company has a product or service that they are selling: and
  • Building and Management: Methods you use to train, motivate, and manage your recruits.

With the right company you are given much of the training, support and systems that improve your possibilities for success. Also, by joining one of these companies you eliminate a lot of the manufacturing, administrative and distribution costs and concerns of running your business as a legit home based business. 

Network marketing is just a business model, and it actually could be considered "micro-franchising". One of its greatest advantages is that it has a very low cost of entry, with the potential for exceptional return on investment and with the right company ongoing residual income.

In every industry you have companies that are excellent and built on integrity and those that are not. Because of the kind of person who would be attracted to this business as I will explain later, there are some of these companies that are not a legit home based business and instead are an illegal pyramid, or "Ponzi", scheme preying on those who are looking for an opportunity to improve their lifestyle. An example of this is where the money is all being made off of signing up other people, with little or no real product ever being delivered.

But in spite of whatever perceptions people may have, the fact is that Viridian, NuSkin, Meleleuca, PrePaid Legal, USANA, Amway and many others have sold millions upon millions of dollars of products to happy customers, many of whom are NOT also reps. So, when it comes to the "bad rap" that these companies get, there may be a perception problem leading to that bad reputation. 

One of the things that contributes to the perception is the things that make a legit home based business attractive - make it attractive to many who are NOT really qualified or prepared to become business owners. The characteristics of MLM make it attractive to people who:

  • have not done well in their business or profession and have little money saved up to invest
  • have no previous experience owning or running a business
  • have no previous experience in sales
  • have little or no experience developing business relationships other than that of employer/employee/co-worker
  • are not satisfied with their current level of income
  • have unrealistic expectations of the amount of work involved compared to the revenue realized

Don't get me wrong—I'm not saying that there's anything wrong with any of these characteristics, and I am not saying that this describes any specific portion of network marketers. There are MANY people in Network Marketing who are Doctors, Lawyers, CEOs and traditional business owners. As well as teachers, mechanics, housewives and students. What leads to the bad reputation is when someone joins a company, possesses the characteristics above and they never take responsibility to learn and grow and therefore never do anything about changing or improving it.

Again, I'm not saying that this describes the majority of network marketers, but it does describe enough of them to tarnish the reputation of the rest. 

So what's the solution?

In life, there's a first time for everything. And network marketing/MLM is a great opportunity for people to have their first legit home based business, their first sales role, etc. My point is this—recognize it for what it is: it's a business, and you are a business owner. And if you've never owned a business before, if you've never done sales before, if you've never networked before, you need to learn about how to do so, not just from the network marketing/MLM experts, but from established experts in leadership and sales fields.

Network marketers who are serious about building a legit home based business should constantly  be reading and learning about business fundamentals, leadership, team building, the latest sales and marketing techniques, strategies for networking and business development, etc.

If you're considering starting your legit home based business and aligning with an MLM, Direct sales Company or Network Marketing opportunity, ask these eight questions to determine whether the company is worth your while (and your money).

1. Who is your upline? Take it all the way to the top. What do you know about the person who introduced you to the opportunity? Can you trust what they tell you? Are they willing to divulge exactly how much they've been making? Do you trust that they are going to work with you and help you become successful? And what about the founders of the company (assuming it's a newer company)? Have they been successful and reputable in their previous businesses? Investigate your entire upline just like you would a business partner you'd never met before.

2. What is the product? Is it something that would sell well in a retail store or via other traditional marketing and distribution channels? What's the competition like? How convincing are you going to have to be in order to sign up customers? Is it a single product line? Or are there additional products and services that you will be able to sell someone after they become a customer? Is the product a "consumable" meaning is it something that your customer will want and need to order again over a period of time? If you're not an experienced salesperson, don't expect to become one overnight. You're going to have to become an evangelist for the product, so make sure you believe in it.

3. What type of training is in place? You can't go from being an employee to a business owner without learning how to make that transition. Many companies will "sign you up" get you excited and just tell you to go out and share the opportunity with your friends. As I said before, to succeed you have to recognize that YOU are a business owner and you have to treat your business as such. The top companies rely on proven systems that are duplicatable and offer training that teaches step by step processes on how to implement those systems and grow into your position as a business owner.

4. Does the marketing system take full advantage of technology? Not everyone has the mentality of a business owner or has a sales type personality, but ANYBODY can plug into a system and tools that manage your business, track your organization and provide the technology and resources that will allow you to be more successful in selling the product or service you are offering. In this day and age if you cannot manage your legit home based business from a computer with an internet connection and a phone, you have to ask if the company is prepared for the future.

5. When will you start actually making money? Don't fall for the line that it takes months or even years to show a profit. You should be able to recoup any investment and start earning income within just a few weeks if there's really demand for the product. Making a living at it is another story. You need to be able to work it part-time in addition to other steadier income sources. Will you realistically be able to do that with this company?

6. Where is the product being promoted and where can you promote it? Is the company doing advertising and publicity of its own to help create demand for the product? And what restrictions are there on where and how you can promote it (advertising, web sites, etc.). There's not a right or wrong answer to that question - a wide open policy is more flexible for you, but for everyone else, too. If you're prepared to be highly competitive, that's fine, but if not, you may prefer to work with a company whose policy is more restrictive.

7. How were you recruited? Were you recruited primarily as a customer, with just a mention of "income opportunity", or was the primary pitch about the business opportunity? The ethical way to build a downline is to sign people up as customers first, and then if they like the product, they'll be drawn to become a rep. A hard-sell on signing up as a rep right at the outset should send up a red flag for you.

8. Why are you doing this? This is perhaps the most important question of all. If you're doing it because you think it's going to help you out of a cash crunch, forget it. If you're doing it because you think you're going to be rich in a year, well, it's fine to have a vision, but don't bank on it. On the other hand, if you really believe in the product, that gives you the best likelihood of success with it.

Is starting a legit home based business right for you?

The opportunity to be successful in a legit home based business increase exponentially when you are able to tap into the experience of those who have gone before. There are options.

  • Find a Mentor
  • Hire a Consultant
  • SCORE (Service Core Of Retired Executives is a non-profit organization which offers advice to small businesses)
  • Purchase a legit home based business that is already successful (but make sure you follow the systems that they have been using)
  • Join a reputable Network Marketing, MLM or Direct Sales company

In future articles and podcasts I will be talking about more things you need to consider as an entrepreneur and sharing skills resources and training that will give you a competitive edge whether you are running a traditional business, a franchise or a legit home based business.

(and of course I will be telling you about the path I chose for myself)

More to come...

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