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JOURNAL
THE JOURNAL REPORT: SMALL BUSINESS
Running the Show
Flying Solo...With a Net
June 25, 2007; Page R7
You don't need your own company to be in business for yourself.
Managers, contractors, professionals and equity partners all have found a middle ground between independence and becoming part of a corporate machine. Many run a small business within a larger organization -- a role that gives them such benefits as a more flexible schedule, the autonomy to make important decisions, and more pay.
Running a business within a business has its risks. You can lose money, and be branded a failure as a manager. The risks come, too, without the satisfaction of being able to make important strategic or marketing decisions. Taking the middle road, though, can have special appeal for employees who have an entrepreneurial spirit but aren't ready to fly solo. Options range from becoming an equity partner in a law or accounting firm, to working for a restaurant chain that gives managers some autonomy and a share of the profits, to opening a store that's part of a purchasing cooperative.
Finding the best fit depends on one's motivations and goals. Someone who's primarily looking for freedom may be happiest as an independent contractor at an established firm, while someone who's mostly looking for a boost in income may be happiest as a partner in a big organization.
At New York-based Deloitte & Touche USA LLP, an accounting, consulting and financial-advisory firm, some 2,760 equity partners and principals buy units of the organization, part of the global group Deloitte Touche Tohmatsu. The partners and principals then share a proportional amount of the U.S. entity's annual profit, Chief People Officer Paul Parker says.
Little Kings
Partners can be like little kings within an organization. They're responsible for hiring and grooming the people in their unit, but also for leadership, bringing in new clients and creating new services. And they're spared the grunt work. Partners aren't paying the bills each month or sifting through the company's options for health benefits.
Still, an accountant or lawyer can work for years without ever being offered a partnership. Mr. Parker says a new college graduate can make partner at Deloitte in 10 to 12 years. But spaces are limited, and much depends on other people seeing their talent and boosting them to the top. Of the 37,000 employees at Deloitte, only about 7% are equity partners.
Some chains allow managers to take a stake in the company, by selling them a piece of the restaurant they manage or by giving them ownership units in the parent. Such options became more visible after some big names, such as Outback Steakhouse, a unit of OSI Restaurant Partners (Related) in Tampa, Fla., and Cheesecake Factory (Related) Inc. in Calabasas Hills, Calif., started giving managers a shot at ownership.
Yard House USA, which has restaurants in seven states, primarily in Southern California, gives its general managers 750 units in the company, which vest over four years. The units are valued by outside experts based on the company's overall sales, assets and other factors, and today they are worth about $100 each, according to Harald Herrmann, president and chief operating officer. They are the manager's to keep or sell, but Yard House, based in Irvine, Calif., has first-refusal rights.
The general managers have responsibilities like picking vendors, setting procedures and deciding staff matters. Currently there are only 16 general managers, one for each existing restaurant of the chain, which has 2,300 hourly workers. And even general managers are still essentially employees. Mr. Herrmann notes that the general manager is "the single most important person in the restaurant," but not the ultimate arbiter of how the restaurant is run.
The strictures of working within a larger organization can limit your upside potential, says Andrew Zacharakis, an entrepreneurship professor at Babson College in Babson Park, Mass. Managers serving a larger entity, for instance, may not be able to tailor their branches to local tastes even when they know it's the right move. Consequently, they can miss out on some profits.
But Zur Shapira, an entrepreneurship and management professor at New York University's Stern School of Business, notes that some people are happy to overlook possible limits on success in return for the safety of working for a larger entity.
"People are more concerned about losses than they are about gains," Mr. Shapira says. "If you're an entrepreneur, you can lose a lot of money."
A step toward independence may be working as a contractor in an established service business. Consider the real-estate world, where agents typically have autonomy and where pay is based on performance. Independent contractors, who represent the bulk of the industry, may rent their office space and keep a larger portion of their commissions than directly employed salespeople, and have more freedom than employees, too.
Re/Max agent Cora Parker chose this route in July 2006, when she became an independent contractor in the Re/Max Top Achievers office in Hainesport, N.J. The office comprises some two dozen contractors who, like Ms. Parker, work completely on commission while paying rent for their office space. Ms. Parker pays about $1,400 a month, plus 5% of her commissions, for her office, for use of Re/Max support staff, and for the cachet of the Re/Max name. She negotiates her own commissions with clients and markets her services as she pleases -- right now, as an agent who focuses on seniors and families with special needs.
Negotiating Points
Some hairstylists work this way, too, as do a number of other professionals. Although it's easiest to get started as an independent contractor at a company that has already embraced this format, experts say talented employees, especially in tight job markets, may be able to negotiate a similar setup with the boss.
Do your homework first. The Internal Revenue Service has strict rules about who qualifies as an independent contractor. The IRS prefers to classify workers as employees rather than independent contractors because employees generate more tax revenue. So research federal and state laws and outline a clear plan for staying independent. If you declare yourself an independent contractor and the IRS or another government agency later classifies you as an employee, you could lose out on some deductions and your employer could be on the hook for back taxes and fines.
When you make your pitch to the boss, focus on the benefit to the company. As an independent contractor, you'll be paying for your own supplies, training and benefits. You'll also pay your own taxes, so the company won't have to worry about withholdings. Agreeing to pay rent is a selling point, too: It creates revenue for the company and saves money.
Other options, though they may require more capital, are to join a cooperative as an independent retailer, or to buy a franchise that gives its operators lots of latitude.
In purchasing cooperatives, companies band together to get bulk rates on raw materials, finished goods or services. Members jointly own the co-op, so they help set policies and qualify for a yearly earnings distribution or refund.
Co-ops Vary
Art Jaeger, a spokesman for the National Cooperative Business Association in Washington, D.C., estimates there are roughly 250 purchasing co-ops in the U.S., which together represent tens of thousands of member businesses. The cooperatives can be nationally branded, like Ace Hardware Corp., based in Oak Brook, Ill., or regionally, like Wakefern Food Corp. and its ShopRite grocery stores, based in Elizabeth, N.J.
Alternatively, a co-op can allow members to make their own decisions about branding, like YaYa Bike co-op, based in Chandler, Ariz. YaYa Bike retailers are independent and name their stores anything they want. But the proprietor has the buying power of a national organization and gets marketing and industry information that may be hard to find as an individual.
A franchise company that gives franchisees lots of latitude may provide similar benefits. Rick Grove owns three Little Gym franchises in the New York area. Little Gyms, part of Little Gym International Inc., Scottsdale, Ariz., are designed to enhance children's motor skills. Mr. Grove has the advantage of national branding and uses established lesson plans, plus he has leeway when making operational decisions. He's chosen polo shirts for employees, for instance, while other colleagues put workers in T-shirts. And he offers dancing at only two of his locations, while some franchisees offer it at every site.
Mr. Grove says he's happy with his choice, partly because he took the time to figure out what he wanted from work and to determine how he would best meet those goals.
That's what Prof. Shapira recommends, too. "You want things to come out of what you think and what you want," he says, "not be a pawn played by other people."
--Ms. Badal is a staff reporter for The Wall Street Journal in South Brunswick, N.J.
Write to Jaclyne Badal at jaclyne.badal@wsj.com (Related)
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