There are four key transition points in the lives of most small businesses: 1) employee to solopreneur; 2) solopreneur to employer; 3) employer to growth company; and 4) Exit. I want to talk about #2 in this post.
Becoming an employer is a huge step in a small business owner’s life. In fact 78.5% of all businesses in the U.S. do NOT have employees. Some small businesses start with employees as a matter of necessity; while other small business owners enter into the mode of employer reluctantly.
Why You May Want to Avoid Becoming an Employer
Here are a few reasons NOT to become an employer:
- Regulatory Requirements: Once you become an employer, you are subjected to thousands of labor laws by your state, federal and local governments. Many of these laws are common sense, but there is simply no way to know them all without hiring an expert.
- Taxes: If you were to hire a contractor to do work for you, you don’t need to worry about paying taxes. Once you hire an employee, you will need to withhold all sorts of payroll taxes.
- Management: Hiring employees will require you to manage your new employees; which will take time and effort away from other tasks that you were performing on your own.
- Facilities: As a solopreneur you may have been able to do most of your work out of your home office with a few occasional meetings at libraries and coffee joints. However, if you need to work with employees, you may have to lease office space to allow you to work with your team.
- Hiring & Firing: In a tight labor market, it is hard to find the right employees for your company. This means that you are subject to long searches for the right employees; and emotional turmoil when you have to fire the wrong employees.
- Responsibility: It is one thing to be responsible for your own income; but it is quite stressful to know that the success of your business is liable for the income of several additional employees who rely on your business for their economic security.
Employment is Necessary for Growth
I’ve laid out a few obstacles that tend to deter solopreneurs from becoming employers. However, in my opinion, the benefits of becoming an employer far outweigh the negatives I have listed above. In order to grow your company beyond yourself, you will most certainly need to hire employees. Here are just a few advantages to becoming an employer:
- Increased Revenue: The average income of a solopreneur is around $50,000 per year; while the average revenue of a employer is $5 Million per year.
- Leverage Skills: Hiring others allows you to reduce the amount of time you spend on tasks that you do poorly while you delegate these tasks to your employees who are more skilled at these tasks. This action creates a synergistic team that performs at a much higher level than a one-man band.
- Meet Customer Demand: Your company is much more likely to be able to handle additional client demands because you have employees available to do the additional work. In addition, your company will be able to take on larger projects because it has the ability to do more work in a shorter time frame.
- Increased Profits: It is quite common for employers to charge more for their employee’s labor than what it costs them. As a solopreneur, you are limited to charging for only your time; while as an employer you charge retail labor rates for all of your employees.
- Legacy: Most small business owners would like the business they have created to survive beyond their lifetime. The only way to do this is by creating a team that you teach how to do your business your way. Otherwise, your business stops when you do.
- Increased Impact: Most business owners start a business to make a difference in the world in some way. In order to make any significant difference, you need to lead a team of difference-makers who subscribe to your vision and mission.
- Time Off: As a solopreneur, your company stops when you decide to take a vacation. If you have employees who can do the work while you are gone; you now can take a well-deserved vacation.
Making the Transition from Solopreneur to Employer?
As the business owner, you have several choices on how you can grow your business at this stage. Let’s say that you are a chef and you want to start your own restaurant. It may be quite normal for you to assume the role as head-chef and delegate management of the front of your restaurant; hire servers, and prep-cooks. On the other hand, let’s say that you are a strong business person and want to hire a head chef while you manage the front of your restaurant. Either solution will work as long as you are doing what you like, are best at, and allows you to still lead your business.
There are some critical skills you will need to develop in order to be successful at being an employer that you did not need when you were a solopreneur:
If you filled a management position for a company prior to starting your own business, you may possess leadership and management skills. Most new small business owners need help in this area. Often times small business owners who have been working for themselves for a time, know what tasks need to be done and how to do them. However, these high-performers often have a hard time transitioning into a leader who can fully communicate to employees how to perform these tasks in a high quality manner. Often times, they will think they have given their new employees sufficient direction and are disappointed when their employees do not do their assigned tasks in a manner desirable by the business owner.
This disappointment is manifest in a harsh tone toward the new employee; or results in micromanagement by the business owner. Both acts tend to demotivate employees and create a stressed out owner.
As a solopreneur you always have various expenses. However, most of these expenses can be controlled by purchases you make either to directly satisfy a client; or are small expenses that are easily controlled and often put on your credit card. Making payroll is much different than any kind of expense you experience as a solopreneur. You need to pay your employees regardless of how well your company is doing or how many customers decide to purchase your products or services. This means that you may have several situations where you have to pay employees either before you get paid by your clients; or even though you are not paid by your clients at all. In addition, employment costs are often the largest cost of operating a business, so they are difficult to put on credit cards.
Some businesses decide to get a line of credit from their bank in order to always be able to pay employees even when their clients pay late; or not at all. A line of credit from a bank will allow the bank to loan a business money to make payroll while the business waits on payment from clients.
While making payroll is a challenge, a new employer needs to be diligent about many aspects of their finances that were not necessarily as critical when operating as a solopreneur. Different businesses require employees for different situations and for different lengths of employment. It is critical to staff at appropriate levels for the level of business you have with clients. Here are a few examples of such staff forecasting models:
- Food Service: Restaurants and food delivery companies have cyclical staffing demands that are based on breakfast, lunch and dinner rushes. In addition, various seasonal activities, sporting events, and holidays dramatically impact staffing requirements. This environment means that food service businesses must have a reliable pool of part-time staff in each job category to make sure they can staff every situation. This also means being flexible to part-time workers who have restrictive availability to work. Most established restaurants have established an annual staff forecasting model that can accurately predict the staff needed during every hour of the year.
- Construction: Most general contractors will hire sub-contractors to perform specific specialty work on their behalf. Each specialty contractor and the general contractor needs to staff at a level that matches their project workload. They need to ensure they have sufficient skilled workers to complete each construction project in a timely manner. The billing schedule and work progress schedule need to be timed well so that the construction company has sufficient cash to pay its workers for labor and its suppliers for materials.
- Professional Service: Engineers, medical professionals, law firms and others need to make sure they have sufficient work backlog for professionals they have on staff. Most professionals ought to bill their time above 65% of their total work hours. In order to ensure your firm has sufficient backlog, you will need to know how many hours are required for each project or client you bring in and what specialties are required to serve that client. In some cases, professionals act as their own sales people, so they work to contract clients part of the time; and then work with their clients the rest of the time. In any case, an employer of professionals needs to ensure that their staff is fully loaded. Otherwise, they are paying very high salaries and not able to bill equally high amounts to their clients.
In every type of small business, it is important to forecast accurately to avoid over and under staffing. It is quite common for employers to continue to use contract labor for peak loads to avoid over staffing.
Most new employers underestimate the amount of time they need to invest in training newly hired employees. Even experienced employees will need to understand the way you want things done in your business. If you hire a professional, the professional will understand how to do their profession, but will not know how you want things done in your firm. If you hire skilled staff, they will understand their trade, but will need to be trained on your way of doing things. If you hire unskilled staff, you will need to provide sufficient training to build their skills in areas that you need for your company.
Often times this training is never-ending. If you are a restaurant, you will may want to change your menu from time to time and retrain prep and cooking staff to make your new entrees. If you are an engineering firm, you will need to ensure your staff is up to date on the latest computer aided drafting and design systems as well as any new design techniques. If you own a construction company, you will need to ensure your staff understands any new construction materials and methods of construction required to build quality projects for your clients.
Unfortunately, most new employers do not understand what they need to provide for training until they see deficiencies in their company after employees are hired. Whether you develop a training program before or after you hire employees, be prepared to continue to identify, and plan for training of your employees. Another key to training is to give your employees increases in their compensation once they have been trained; especially if the training they have received makes them more valuable to your competition.
It is not only necessary for you to properly manage and lead your new employees; it is critical that your staff work well together. Some of the best teams are made up of diverse people with diverse backgrounds and personalities. As a manager, you need to staff your team with skills that fit their role and fit with fellow team members. It is common for any new team to go through four common stages of team development: 1) Forming; 2) Storming; 3) Norming; and 4) Performing.
When you hire a team of employees, you have a vision for how your new team will work together. You hire diverse people with diverse skills sets and feel like you know exactly how each will work together. You even give each member their position description that outlines exactly what their role will be in the team.
It is normal for each team member to have their own way of doing things that is in conflict with others on the team. Each team member will resist doing tasks a way that is either different than what they are used to doing; or not consistent with their ideas of how things ought to be done. If this is not enough, newly formed teams often do not respect personality differences of their team members and resist these different work styles creating friction among the team.
After team members get tired of arguing about every task, they will often move into a passive mode. They will not question their teammates; and will either act as if their teammates don’t exist; or ignore tendencies they find odd. Although Norming is a more productive phase than Storming, it is not advisable for any team to stay in this mode for very long.
The goal of any team is to be able to produce results that are greater than the total work output of individual team members. This high performance will result when each team member not only tolerates their teammates’ differences, but tends to leverage team member differences.
In order to move through the four phases of team development quickly, the business owner must mediate team disputes and provide the ultimate decision making role for their newly hired team. If the owner ignores their responsibility of team leadership, either a natural leader will emerge from the team who may or may not reflect the owners’ desires; or the team will never reach the performing stage of development.
It is impossible to be fully versed in all employment law. However, it is helpful to know some of the major laws governing employers. Some basic keys to remember is to maintain a safe working environment for your employees, pay them enough, do not discriminate for non-work related characteristics of your employees, and treat employees fairly with discipline, hiring and firing practices. Many of the onerous federal labor laws do not apply to companies who employ fewer than 50-employees because the government is somewhat aware of how challenging such regulatory requirements are for small businesses.
All-in-all becoming an employer is a great experience. You will experience some challenges, but it is great knowing that you are elevating the skills of your staff and providing a much better experience for your clients. If you need help either gaining employment skills; or working with your staff, I’d love to help you build a better company. Just fill out the contact form below.
Note from the Author
My name is Jeff Schuster. I am a certified Life and Business Coach serving small business owners, corporate executives and others who want to transition from “expert” to “entrepreneur”. I have been a small business owner for most of my 30-years in the workplace. I grew an energy efficiency and renewable energy engineering and construction company from nothing to over $10-million/year and sold it in 2013. I now help other business owners make amazing progress toward their own dreams of business ownership independence and success.