Get your sea legs before launching on your own

Being your own boss is one of the great American dreams. But it can be a hard dream to realize -- partly because those giant corporations offer such secure berths for their employees. A regular paycheck is only the beginning; all manner of fringes can easily work their way onto your list of ``can't live withouts.''

So leaving the safe harbor of corporate benefits requires two sets of plans -- one for the business you're planning to launch, and one for yourself, to replace necessary corporate benefits. And the first set must come first. Here are some points to consider:

Spend the money to do it right.

Don't make the leap to your own business without some sort of general management experience first.

Remember, you don't always need everything you think you do.

Two years ago, James P. Masciarelli, with his partner, Charles Polachi, founded Fenwick Partners, an executive search firm specializing in high-tech industry.

Fenwick Partners' headquarters are in a shiny new office park here, tucked just inside Route 128, Greater Boston's technology beltway. A flock of Canada geese flutters around the little pond out front. The firm's interiors are graced with prints of hunting scenes -- and with eight antique rolltop desks.

The office location and the decorating scheme are part of the strategy. In the executive-search business, ``image'' is a legitimate concern. And a company trying to succeed in a people-intensive service business has to be prepared to pay good salaries and benefits to attract the people it needs.

Down in Washington D.C., Robert G. Kalik had to make some of the same decisions as Fenwick Partners when he hung out his own shingle two years ago. He is just 31. But today he's a partner in his own firm, Potts & Kalik, specializing in international trade law. His move to self-employment came when a number of lawyers in the Washington office of the firm where he was an associate decided to spin off their own firm.

After weighing both staying put and going with the spinoff, he took a third path -- going it alone. He started with just two clients, good for around $30,000 in billings a year.

He and his partner -- she started out as an office-mate just to share the expense of the phone system -- still have enough time in their schedules to handle administrative chores themselves rather than hire out. But their practice has grown to about a dozen clients -- ``exactly the kind of clients we want.''

Potts & Kalik opted to ``spend the money to do it right.'' They bought a word processor and other office equipment, and like Fenwick Partners, furnished their offices with antiques -- as investments, and as a way to present an image of quality to their clients.

What about the importance of general management experience? ``A lot of people skip a step -- it's a big mistake,'' says Mr. Masciarelli, referring to people who start businesses without it. As it was, Masciarelli and his partner had cultivated relationships with bankers and others in the community. And so when their prospective landlord demanded six months' rent up front, for example, they were able to offer instead to have the rent guaranteed with a bank letter of credit.

What if he hadn't had contacts at the bank? ``Then I wouldn't have been ready to start the business,'' Masciarelli replies.

(While we're on the subject of bank managers -- one financial planner notes that they tend to move around. If you find one you like, be prepared to follow him to another branch. And while you're in the getting-to-know-you phase, it's not a bad idea to just call a banker up and ask him to lunch.)

Bob Kalik has found ways to cut corners without too much suffering: leaving his car on the street instead of in a garage, and ironing his own shirts. ``I date less -- or I let women take me out,'' he says with a chuckle.

Part of Fenwick Partners' strategy was setting up the company as a Subchapter S corporation and starting out in the middle of the year. With Subchapter S, corporate losses become tax breaks for the two stockholders, who were just leaving high-paying jobs.

The company didn't see many sales dollars until after the first of the next year. ``Aggressive'' spending for start-up costs gave the partners a further tax break. The high rate at which tax had been withheld from their salaries on their previous jobs also helped.

This timetable and incorporation strategy meant improving cash flow by reducing income and increasing expenses. When the company became profitable, it made sense to become a regular corporation and benefit from lower corporate tax rates.

Mr. Masciarelli recommends this strategy for small businesses expected to grow rapidly but run at a loss for the first year and a half or so. (For more on Subchapter S corporations, see Page B8.)

As for the second set of plans an entrepreneur needs: To talk about the personal financial planning aspects of going into business for yourself may sound like a contradiction in terms.

After all, financial planning is all about being sound and conservative, and thinking ahead, right? And entrepreneurs are reckless types who put everything they have on the line, right?

Dr. Andrew Rudnick, executive vice-president of the Houston Economic Development Council, has worked with ``hundreds of start-ups and young businesses'' over the past six or seven months, and not one of them has asked for personal financial planning help, he says. ``The critical need is not on the personal side, but on the business side.'' These entrepreneurs ``recognize that personal aspects are secondary.''

On the other hand, many financial planners stick to their basic rules, such as ``Pay yourself 10 percent first,'' even among entrepreneurs. In fact, many financial planners work for themselves and know what it's like to start out solo.

Wayne Chodkowski, president of Business & Wealth Advisors in Dunwoody, Ga., is one of these, and he pushes hard for the 10 percent rule -- and he likes to have that 10 percent of gross, not net, if it's at all possible.

Many business owners seem to be wary of liquid assets, since they're taxable. ``But we can defer taxes,'' Mr. Chodkowski says.

On the other hand, in defense of entrepreneurs whose savings programs may not be as neatly packaged as their corporate counterparts, he notes, ``The best way to accumulate wealth is in the business -- it's not like they're doing nothing.''

Even if you don't incorporate to limit your liability, putting money into a home will shelter assets from bankruptcy court, notes Gordon Ramsey, a principal in the tax department of Coopers & Lybrand in Los Angeles.

Jack C. Harmon, a financial planner in Atlanta, suggests that rather than draw on savings, entrepreneurs establish a line of credit collateralized with their savings. ``Psychologically it's better -- especially at the beginning, when income can be so sporadic.''

Mr. Ramsey is one of a throng of advisers who urge entrepreneurs to budget generously, both for time and for money, when launching a business. ``If $50,000 is good, $100,000 will be better.''

Fred DeVinney, a financial planner in San Francisco, warns that without an adequate cushion of capital to start out with, an entrepreneur can become ``very uptight about cash flow,'' tending to make decisions more for their short-term than their long-term value. He is also wary of home-equity loans except as a last-ditch emergency source of capital.

Planners see health and disability insurance as essential for business owners, along with life insurance for those with families. Disability insurance should have a 90-day ``elimination period,'' suggests Harmon; otherwise premiums will be too steep. Disability overhead insurance is also essential to keep an enterprise going should the owner be out ill.

The one major financial goal planners will generally excuse entrepreneurs from trying to meet during the crucial start-up years is preparing for their children's education.

Mr. Ramsey tells of meeting with a young entrepreneurial couple recently and being surprised to find they were concerned about a college fund for their six-month-old daughter. ``For them that should be an absolute low or no-priority, since that can reasonably wait.''

The consensus among planners seems to be: Launch your business while the kids are young enough that if you fail, you still have a few years to regroup financially before they are ready for college.

Of course, the entrepreneur may want to invest some of his children's college funds in the business. In setting up Fenwick Partners, Mr. Masciarelli and his partner designated 75 percent of the money they put in as a loan; it will come due in five years -- just as Masciarelli's son turns 18.

What if your venture doesn't work out? What if you have to go ask someone else for a job? Some employers are wary of hiring someone who has been out on his own, Masciarelli says, but it doesn't have to be so. The important thing, he says, if you fail, is whether you ``know why you failed, and can explain that dispassionately to an employer. . . . Take responsibility and you'll always win.''

Talking with Bob Kalik, one has the impresssion that he has been freed foreover from the mind-set of lawyers who feel lost without the security of a big firm. He sees ``a tremendous amount of jobs I could do if the firm fails. . . . There are so many skills I do have.''