Starting a business

[lhamilton1807]

I mentioned in another thread that funding for a business I’m starting landed recently. I’m super excited.

Wanted to start this thread as a general place to discuss self employment or business ownership.
Taxes, employees, funding, marketing, fees, sales, systems, software, hardware, whatever.

So I’ll get things started.

Choosing a Business
I didn’t like the idea of starting a business from scratch. Too much risk of my screwing it up and losing everything, so I’ve avoided the idea of owning a business even though it’s interested me. Last summer I was approached on LinkedIn by a franchise consultant who offered to explore franchises. I figured it couldn’t hurt. He took an inventory of my skills, interests, and goals, then made a list of franchises that he suggested I consider. Of those 10, I filtered it down to 3 and started meeting with the franchise development rep for each one. I landed on a pool service business that has quick growth, excellent support, and excellent systems in place. It’s not an owner/operator model - the goal is to run it as an executive. My hope is to expand into more territory or another business in 5-10 years.

Funding
For funding, I explored a few options. I could’ve borrowed against the house with a HELOC, but I’d have to tell the bank it was for home remodeling or something similar. Didn’t like that idea. Or get a standard or SBA loan. The interest rates are awful right now and I didn’t want to saddle my business with loan payments right from the beginning.
I ended up going with a ROBS (rollover for business startup) arrangement. Requires a ROBS administrator, and there are lots of them. Steps are:

1. Form a C-Corp with the Secretary of State on my state
2. Set up a 401k plan run by the c-corp
3. Roll over pre-tax retirement funds from a previous employer’s 401k into the c-corp’s 401k
4. Set up a business acct at a bank
5. Withdraw & from the new 401k into the business bank account and issue stock )1 stock for each $ rolled over)
6. Use the $ for your business expenses

It sounded super sketchy at first but it’s a totally legit way to fund a business. This is not a loan - it’s buying stock in my own business. There are a lot of regulations around this transaction, which is a downside. Also the tax situation isn’t as nice as a LLC, which essentially rolls right into one’s personal taxes. With a c-corp, the business pays taxes and then I will pay taxes on my salary from the business. LLCs are only taxed once. I will control taxes by investing in the business, then eventually do a stock buyback and unroll the whole c-corp by converting it into a LLC. It’s down the road tho.

Preparing for Launch
The best time to launch a pool business in a seasonal market is early spring, so I will launch in March. Now I’m going through initial checklists while still working at my old job and saving some $ for the lean startup time. I’ll leave end of Jan/start of Feb to work out the last few startup items

• Business errata - PO Box, new business phone number, EIN, DBA letter for the bank to accept payments on behalf of the franchise, etc
• Marketing strategy (which zip codes to focus on?)
• Buy or lease a truck/van, get it wrapped, buy tools & chemicals
• Find a bookkeeper and CPA familiar with ROBS funding and regulations
• Hire an employee
• Go to the weeklong training

[JohnB]

A couple things:

I am not certain how far down this rabbit hole you are.

Are you putting your future retirement at risk? How right does this need to go?

Do the costs associated with the c corp, and accountants, and lawyers exceed the cost of an sba loan?

Why work for someone else when you can create your own business by door knocking on the weekends or flyers or buy a route and own the business?

Hiring an employee is an early step?

You want to open a C Corp to own a franchise?

Did they show you revenue streams from past franchises? Let you talk with recent franchises?

Does it seem like a lot of start up costs and overhead for a fledgling business?

Most small business owners I talk to are the executive, head of hr, head of complaints, chief operating Officer, head Ditch digger, and the first second and third mate all in one.

I wish you the best of luck and focus on any future endeavors.

[lhamilton1807]

JohnB thank you. This kind of discussion is exactly what I wanted to start. Answers below

Are you putting your future retirement at risk? How right does this need to go? Less than 1/3 of my retirement savings was rolled into this. Because employers don’t usually allow you to roll over their retirement plan until you’ve left their company, the only $ I could use was from previous employers’ plans. That’s the money I tapped for this. Your second question here weighed heavily on all my decisions, and in part it’s why I chose this funding path. If the business fails and I have a loan, the income goes away but the debt does not. I’m screwed NOW because I’d have to pay back a loan on a business that’s not generating income. In my case, if the biz fails then both the income and equity dry up, but there’s no loan to pay back. So from a cash flow perspective I’m just out of a job. I’m 44 so there’s time to save more over time. Additionally, because there are no debt payments, there’s less to hold the business back during the ramp-up period; it’s more likely I’ll become profitable sooner because there are fewer ongoing payments. If I’m able to get to profitability (something I see as MORE likely because of the business systems & support in place) I can buy back the stock and roll the 401k back into index funds. I see less risk with this funding source, not more.

Do the costs associated with the c corp, and accountants, and lawyers exceed the cost of an sba loan? Originating costs are $3k to originate the ROBS funding, and it’ll cost $900 annually for plan administration/compliance starting month 13. $900/yr is far less than the interest payments for a SBA loan of similar size (~$150k in funding at 7% over 10yrs = $1750/mo payments and ~$60k in interest total). $9000 total for plan administration over 10yrs is pocket change in comparison. I had the origination cash on-hand, and those costs actually translate into shares in my new company because they’re considered startup investments. When (“If” - this is still just a plan at this point) I buy back all the stock, I’ll pay my checking acct back the increased value of each share. Bookkeeping & tax prep costs would’ve been required regardless of the funding source.

Why work for someone else when you can create your own business by door knocking on the weekends or flyers or buy a route and own the business? Because I don’t know jack about starting a new business, especially a pool cleaning business. I’m an IT guy with a MBA, so I understand the theory but not the practice. Opening a franchise gets me access to: weekly coaching, branding, in-house marketing (SEO, AIO, marketing blitzes targeted to my territory), a 24x7 call center for lead generation, custom-built CRM for the pool biz, and access to over 200 other franchisees in a business with a share-your-secrets culture (because my success can never encroach into their protected territory). Through my time at a big tech company I’ve learned that good systems work, and even an idiot can run a solid operation if the systems & processes are solid. This franchise has solid systems & support in spades. I’d rather pay a franchise fee and STILL get good margins if it means the business is more likely to succeed. I could keep all of my paltry earnings and burn myself out self-starting a business (see your last comment about all the hats I’d need to wear), but that doesn’t sound like success to me.

Hiring an employee is an early step? Yes. I plan to hire someone with 7+ years of experience with cleaning & repair. The idea is to hire someone who could either run ops or the repair side of the business once it’s big enough to split into its own division. This is the pathway to a truly executive model in this biz. This means I won’t be screwing up the cleaning & repair work with my first few customers. I’d rather get good reviews and referrals. Other franchisees have consistently pointed to an early experienced hire as a good investment. Noobs can be hired & trained later.

You want to open a C Corp to own a franchise? Because of the funding path that I chose I MUST open a c-corp. The IRS won’t allow me to establish any other business type. I’d rather use a LLC because of the tax benefits. As I mentioned earlier, the hope is to become profitable, buy back the stocks, and transition to a LLC later. It’s a trade between the interest payments and advantaged tax arrangement (Loan + LLC) vs a worse tax situation + no loan to repay (ROBS + C-Corp). Regulations are what they are, and I’d rather not go to jail.

Did they show you revenue streams from past franchises? Let you talk with recent franchises? Yes. I spent ~2mo going through what’s called “validation.” That involves going through the FDD (financial disclosure document, which they’re required to provide) and speaking with franchisees, especially ones in seasonal climates like mine. I’m in OR, so speaking to a franchisee in FL wouldn’t give me a good idea of what the business looks like. This franchise started in Vancouver, BC and I spoke with that franchisee since the climate is very similar to mine. It’s a different model than FL in that pools open & close here (they’re open year-round in FL), but here the hot tubs start up when pools close. Plus with the warming climate, pools stay open longer. I was skeptical at first but my questions were answered satisfactorily. Open/close service is actually very profitable, as are wintertime repairs (most people ignore small repairs until the pool is closed for the year). The business is seasonal in that the services shift throughout the year, but the business won’t shutter in the winter.

Does it seem like a lot of start up costs and overhead for a fledgling business? All told I’m starting the business with ~$140k, and will have ~$35k more to use as cash on hand during ramp-up. It’s in line with what other home service franchises I looked at. Because this can ramp quickly, I anticipate the investment will be earned back. I can’t predict the future, but then again no business owner can, esp in this economy.

Most small business owners I talk to are the executive, head of hr, head of complaints, chief operating Officer, head Ditch digger, and the first second and third mate all in one. Yep, and because there’s so much support to help gain customers, build routes, expand, and keep the business financially efficient built in from day 1, I don’t have to be EVERYTHING from the start. I have help. The goal is to become the executive and hire ops managers. It’s the explicitly advertised model for this franchise. I’ll be many of these things to start, but I don’t anticipate I’ll be in the truck more than a month or two. I want to hand out many of these roles over time so that I have time to start another business, and this franchise, according to other franchisees, enables exactly that.

Awesome questions! Right now these goals are all aspirational. I’ve paid for the franchise and am preparing to launch, but the business is not operating right now. The rubber will meet the road in spring, and I’m sure I’ll learn how funding, marketing, hiring, and operational choices could’ve been made differently as I go. I look forward to the challenge, and I’m glad I have internal coaches and systems that will help me adjust along the way.

[tunaman5]

Plumbers around here are charging 325.00 per hr and you cant even book one less than 3-4 weeks out. Food for thought.

[lhamilton1807]

DarqSpark yes, and pool cleaning requires none of that, and repair only requires a GC license, nothing crazy like what you mentioned. I can charge $150 for a weekly cleaning & chem balance that takes 20-30min to perform. The barriers to entry are far lower, but the $ is roughly the same as the above $325/hr

[DarqSpark]

Absolutely, I understand you don't need any of that for a pool cleaning business. You just mentioned that you were considering an electrical contractor business, which is where my comments are pointed.

I hope my comments didn't come off as me throwing cold water on your plans. I applaud your well thought out approach, it seems like you have the background and education to be successful.

I think everyone should be working on some way to go into business for themselves. Best of luck in all your endeavors.

[lhamilton1807]

All good. I was trying to say that I agree with why other trades aren’t a good idea quite yet. So much gets lost when it’s just text 😒
I appreciate your input. Comments like this really challenge assumptions.

[SonofaBaddad]

Small local business owner here as well. I'm partner in a small construction company that's been in the family for three generations. It's honestly all i know and I'm lucky to have awesome employees.

[lhamilton1807]

Cool to hear you run a small biz. I’m sure I’ll have to pick your 🧠 for tips & tricks
Pool cleaning is a “hire slow, fire fast” industry and I may struggle with that, esp with affordability being what it is. I’ve had a good feel for interviewing and hiring good people in my current job, so I hope that translates.