Rural entrepreneurship: Creating a big business in a small town

A big city can be a great place to launch a new business. It offers a large market with lots of potential customers, a wider variety of available skilled employees, better access to suppliers and transportation, the list goes on. But not all of us want to live in a big city. Many entrepreneurs seek the slower pace and quality of life that small towns offer but think that there may not be as many good business opportunities. In fact, many rural entrepreneurs find that there are just as many good opportunities, maybe even more, with just as much revenue potential and potentially higher profitability. Sound intriguing? Read on…

Owning a business in small town or rural area offers a number of advantages. First, quality of life is often greater. Less traffic and congestion, better schools, lower crime, more outdoor recreation opportunities, etc. make smaller towns appealing for both owners and employees. Second, entrepreneurs also often find that smaller markets offer less competition. Instead of 20 or 30 coffee shops or half a dozen Thai restaurants, you may only have one, or none, in your town. An entrepreneur in a smaller market can even sometimes create a temporary local monopoly, exploring a niche that hasn’t yet been pursued locally, at least until competitors realize what a good market it is. Third, fewer competitors often means more pricing power and higher margins. When you don’t have dozens of companies competing for your customers, you can sometimes charge a little more for products and services. Fourth, smaller markets are often cheaper places to do business. Office space, wages, advertising and business support services are often much less expensive than in bigger cities.

Better quality of life, less competition, higher margins, lower costs…sounds like an entrepreneur’s dream. So what’s the catch? Unless you operate an online business which can be located anywhere, most of the time growth potential is limited in small markets. If you start a successful business in Atlanta, you can continue growing by just targeting another part of the same market. In a smaller market, you can quickly hit a limit to growth. Another limiting factor is the labor market. It can be more difficult to find the right employees with the right skills when you need them in smaller areas. Another issue is that sometimes markets aren’t big enough to support some business models. Take my hometown as an example, Boone, North Carolina. The city’s population is around 13,000. Even if you include the county and students at Appalachian State University, there are still less than 60,000 potential customers, not counting tourists and visitors. While that’s a big enough market to support several coffee shops, a couple dry cleaners, lots of restaurants (thanks to tourists), it is too small for businesses like Best Buy or Barnes and Noble or even a big multiplex movie theatre.

So how can you overcome smallness and retain all of the obvious advantages of owning a business in a more rural area? Sell online to customers all over the world? For a few businesses, that might actually be an option. A more viable option for many rural businesses is to think regionally. Using Boone as an example again, if you add up the total population of just the counties that border Watauga County, instead of 60,000 potential customers, you now have a market of over a quarter million people. A majority of those people live with 30-45 minutes of town and many of them already come to Boone periodically for shopping, cultural and recreational activities. Of course, people aren’t likely to drive 30-45 minutes to go to a coffee shop or get their prescription filled, but they might very well drive that distance to buy something they can’t get in their own town or something BETTER than they can get locally. You can make it even easier for remote customers by taking your business to them or giving them a place online to do business with you.

Let’s take this example one step further. What if you considered your market to be everyone you could reach by car within an hour or so? When I ran a technology firm in Atlanta, I would frequently drive an hour to the other side of town to visit a customer. If you include all of the counties within one hour of Boone, now we’re talking about 620,000 people! Some businesses might be able to serve that market out of single location. For others, it might mean opening multiple locations throughout the region.

The keys to making this happen are to think regionally and harness the power of the internet. If entrepreneurs, business leaders, educators, economic development officials and chambers of commerce work together, everyone can win. Yes, it might mean a little more time in the car occasionally to drum up business. And yes, it will likely mean a bigger marketing budget and more investment in information technology. But if the result is that your business now has 5-10 times the growth potential without having to give up all of the benefits of living in a small town, it just might be worth it.

Don’t live in a big metropolitan area? Create your own!

Now is a great time to launch, buy or grow a business. Say what?

Real estate prices are down. Unemployment is up. Your retirement plan is down. The U.S. auto industry is hanging on by a thread. Health care is getting more expensive. Banks are being bailed out by the government. Small businesses in your town and mine are struggling. Despite all this bad news, now could be a great time to start a business. Say what?

Yes, now can be a GREAT time to launch, buy or grow a business. Companies like CNN, MTV and Microsoft were all started during tough economic times. Some businesses thrive in recessions – grocery stores, auto repair shops and low-cost hair salons are just a couple of examples. Sure it’s more risky when the economy is down, but it’s always risky to start a business.

There are lots of reasons to start or grow a business in tough times like this. Here are my top eight:

1) Fewer competitors - The weak are failing and few new competitors are coming into the market.

2) Fearful competitors - Many remaining competitors are cutting back on marketing, meaning your marketing dollars will have more impact.

3) Lower cost facilities - With commercial vacancy rates up, now is the best time to negotiate a lease. If you want to buy commercial property, prices may never be lower.

4) Cheaper equipment - All that equipment from failed businesses ends up somewhere. Need a used copier for your office or a commercial dishwasher for your restaurant? Think eBay.

5) Better negotiating power - You may never have better negotiating power with suppliers, advertisers, shippers, contractors, etc. than right now. They’re all hungry and willing to cut prices to get your business. Need a website? A new wall in your office? Don’t wait.

6) Recruiting power - Now is a great time to attract talented employees. Everyone from bright young college graduates to experienced professionals is looking for work.

7) Cheaper money - Interest rates are low. The Small Business Administration now guarantees up to 90 percent of qualifying small business loans. Investors, if you can find them, are more realistic in the returns they expect on their investments.

8) Low business valuations - Companies that are making less money (or no money) are worth less than they were a couple years ago. That means you can buy a business for less.

Does that mean you should just jump into any type of business right now? No. Clearly it is a tough time to sell luxury goods. People are eating out less, so starting or buying a restaurant is even more risky during tough economic times, but a low or moderately priced restaurant with unique menu options could do well. McDonald’s was one of only two Dow Jones companies whose stock price rose in 2008 (the other was WalMart).

Don’t let the all the bad news get you down. For entrepreneurs, this can be a once in a lifetime opportunity. Everything is on sale! Take advantage of it. And when the economy does come roaring back, you’ll be one step ahead of your competition.

Is buying a business an option for young entrepreneurs?

More often than not when young people think about entrepreneurship, they assume they have to go out and start a new business. Why not buy one instead? Think you're not ready to do that? Don't have enough money? Think no one will sell to you? Think again...

There are approximately 80 million baby boomers in the U.S. born between 1946 and 1962. Virtually all of those people will be retiring over the next 5 to 15 years. Many of them own businesses that will transition to new owners.

Let’s look closer at the numbers. There are approximately 25 million businesses in the U.S. and 6 million of those have employees. According to the most recent US Census data on business owners (2002), 31% were over the age of 55 and 29% were 45-55. Let’s conservatively assume that 50% of all employer firms will change hands in the next 15 years. That’s 3 million companies in the U.S. that will change owners, not counting the many smaller sole proprietor businesses. 200,000 companies a year will face an ownership transition! Some of those may sell to family members, other companies, or investment groups, but a large majority will be sold to employees or individual buyers.

When a small business owner is ready to retire and doesn’t have family members who want to take over the business, how does he or she find a buyer? First, they often look at their employees. Is there someone already there who is capable and interested in buying the business, and most importantly, has shown that they are up for the challenge? If owners can’t find someone internally, then they often work through business brokers to find buyers.

If you’re in your 20’s and want to buy a business, one strategy is to find a company you like with an owner close to retirement, get a job there, take on leadership responsibilities and over time make yourself a valued and trusted employee. Make sure the owner knows that you have aspirations to own a business some day. When the owner decides it’s time to sell, you’ll be one of the first people they think of. The other option, albeit a little more difficult, is to work with business brokers. Of course they’ll want to first make sure that you have the financial resources before they’ll work with you.

Do you think banks won’t lend money to you to buy a business when you’re young? You’re probably right, unless you have a rich uncle who steps up to co-sign a note and provide collateral. If you don’t have a lot of capital, does that mean you can’t afford to buy a business? Absolutely not. A majority of small business transactions include a significant portion of owner-financing. This is particularly true of small retail and service businesses that might sell for $50,000 up to $500,000 or so. In fact, you may not have to engage a bank at all. This is where that personal relationship between you and the owner(s) becomes very important. If they believe in you and trust that you can take care of their baby that they’ve helped grow over the last 10, 20, 30 years, then they’ll look for ways to do a deal with you. Yes, you’ll probably have to come up with some cash as part of the deal, but you can likely structure most of the financing through a multi-year loan from the seller. There might also be an earn-out piece that bases part of the selling price on the future performance of the company.

So how does this work? Assume you’ve found a business you’d like to buy for $300,000 that generates $120,000 per year free cash flow, after the owner’s salary. Let’s also assume you’ve got a great relationship with the owner, either because you’ve worked there, or you’re a long-time customer or you’ve just hit it off during the negotiation process.

Here’s a relatively simple way this transaction might occur. You offer the seller $30,000 in cash and pay the remaining $270,000 over five years at 6% annual interest. That means your monthly payments would be $5,220. Where does that money come from? The cash flow from the business! Remember, each month that business is generating $10,000 or so in free cash flow. For the first five years you own the business, you’ll pay the owner $62,640 annually in principal and interest. Is this a good deal for the owner? Sure it is. They’re earning 6% on their money (try to find that kind of deal in a CD at your local bank!) and worse case if you don’t make the payments, they can take back the business. Is it a good deal for you? Yes again. Assuming the business doesn’t tank, you’ve got enough cushion to make those payments and still have some profits. Plus, the seller still has a vested interest in seeing you succeed. After five years, or sooner if you pay the note off early, you own the business free and clear.

So yes you can buy a business when you’re young. You’ve still got to come up with some cash, but hey, isn’t that what friends and families are for? There will be tremendous opportunities over the next decade. It’s not easy, but if do your homework, find the right business and work hard, that dream business can be yours.

Why it's easier to start a business in your 20's

As an entrepreneur educator who has worked with hundreds of young entrepreneurs, I've seen many successes, often as much of result of young age as anything else. Clearly there are disadvantages to starting young - lack of industry knowledge and limited access to capital just to name a couple - but young entrepreneurs also have some clear advantages over their more "mature" competitors.

First, and probably most important, most young entrepreneurs know how to live cheap. Ask a group of 22 year olds if they can live on $25K a year and virtually all will raise their hands. What happens if you ask the same question to a group of 45 year olds? So keep that second hand car for a couple more years. Share an apartment with friends. Move into your mom and dad's basement. All that means less capital requirements for the business. Instead of paying yourself, you can reinvest early profits back into the business.

Second, and obviously related, young people often have fewer responsibilities. It's a lot easier to take the risk of starting a business when you don't have children, a big mortgage, etc.

Third, everyone wants to help when you're young. The local press will be eager to do a story on your business. Teachers will spend time with you. Successful entrepreneuers in the community will go out of their way to help. And virtually everyone will do this for free, just because they want to see a young entrepreneur succeed. People don't care us much when you're 45.

Fourth, when you're young, you have less fear of the unknown. As we age, we learn more, often too much, and can talk ourselves out of taking risks.

Finally, when you're young, it's a lot easier to put in those 70-80 hour work weeks often required in the early days of a startup. You'll likely never that level of energy again.

So if you're a 20-something with a great idea, go for it! Follow your passion and start a business or a social entrepreneurship venture doing something you love. I'm not suggesting that you should go blindly into a venture. Do you homework, work for a similar business, get a mentor or do an internship first.

And don't worry about those long work weeks. Wouldn't you rather spend 70 hours doing something you love than 40 hours a week doing something you don't?