(FORTUNE Small Business) – He has built his entrepreneurial empire on his talent for imposing order on financial chaos, and as the founder of Paychex, the nation's second-largest payroll processor, B. Thomas Golisano turned himself into a billionaire in the process. By making it simpler for small companies to pay their employees and file their taxes, he tapped into a client base that similar companies ignored. "I knew we had a model for success, and I was stubborn enough to say we're not going to fool with that model," he says.

That attitude has paid off: Paychex sales topped $1.1 billion last year (up 15%), and profits rose to $293.5 million (up 7%). More recently the Rochester native ran unsuccessfully for New York governor, on the promise that he was the man to tame the state's budget. And this past spring he rescued the Buffalo Sabres hockey team by purchasing it out of bankruptcy. Perhaps the gruff entrepreneur's determination to spread financial discipline isn't surprising, given that he learned some of his most powerful business lessons watching his father's small business failure lead to bankruptcy. He says his experience running Paychex has also allowed him to give back to New York. "I feel connected to it," says Golisano, 61. "If it needs help, somebody's gotta help it. If I have the capacity and resources, I will." --ELAINE POFELDT

"I came up with the idea for what later became Paychex in 1970 when I was working for Electronic Accounting Systems, a company that sold payroll processing to companies with 50 to 1,000 employees. One day I began thinking that, as you drive down the street, most businesses you see have fewer than 50 employees. So I went to the library and confirmed that. I found out that 95% of the country's businesses had fewer than 50 employees, and began to think about the fact that nobody was offering services directed specifically at that part of the business market.

I created a service for small businesses by making three modifications to our company's packages for bigger clients. First, I decided that we should allow small companies to call in payroll information by telephone, instead of filling out complex payroll sheets and having them picked up by our couriers and brought to our processing center. That would take the entrepreneurs only two to three minutes, and it would save us on pickup costs. The second change was to offer small employers the option of having us prepare their payroll tax returns. Big clients usually had the expertise on staff to handle it, but many small companies didn't. Finally, I wanted us to offer it at an affordable price.

I went to executives at Electronic Accounting Systems with my plan. They looked at me and said, "We don't think it's a good idea." I sat on the idea for about two more months. Then I walked into the president's office one more time and said, "What do you think?" He said no. I said, "Well, I'm going to leave and start a company." It was November 1970. I was 29. He wished me well, sort of.

I had a good enough relationship with the company that I actually rented space from it in its building and made use of its computer processing capability for our first four years, until we developed our own. Why not? It gave me the opportunity to get into this business without having to make a huge investment in software and hardware. Electronic Accounting Systems processed my little payrolls like one big payroll. I did the selling, and the people I hired did most of the operations. It took me a year to get our first 35 to 40 clients using direct mail and five years to get our first 300 clients and break even in Rochester. That branch today sells 300 new clients a month.

We really took off in 1974 when Phil Wehrheim, whom I had worked with at the other company, walked into my office and said, "It looks like Paychex is going pretty well. How can I get involved from an equity perspective?" After much discussion, we decided to open up an office in Syracuse, N.Y., and went fifty-fifty partners in it. Phil and I eventually opened Buffalo and Albany as well. After I got that established, an employee of a client came by and wanted in. I liked this guy a lot. I asked him if he was willing to move to another part of the country. He said, "Yes, I'd like to go to Miami." He wanted to be a franchisee, so he paid me a small upfront fee and agreed to pay my expenses and a royalty. I spent the next four years, from 1974 to 1978, adding more partners and franchisees.

By the end of 1978 we had 11 partners and six franchisees, we were operating in 22 cities, and we had about 6,000 clients. We had left Electronic Accounting Systems and were doing our own processing on our own computers. I then began to get concerned about some issues. People's ambition levels varied: Some were aggressive and wanted to open up in more cities, and others wanted to sit on their laurels and just operate in one. Because I had sort of guaranteed three or four cities to each person, that meant there would be open territories for a long time. Second, some partners and franchisees were very good on the operational side of the business and not very good on sales and vice versa. So we weren't doing a really good job of skill matching. We were all still financially very weak, and everybody, especially me, was starting to wonder how I was ever going to walk away from this environment, because I couldn't afford to buy them out and they couldn't afford to buy me out.

So in 1979, I got the group together--18 of us plus our banker--in the Bahamas and spent two days presenting to them an idea for consolidating the 18 companies into one. We would become employees and shareholders of a much larger entity--an entity that would eventually give us liquidity and a higher value when we sold the corporation or took it public within five years. I came up with a formula to determine how much stock each individual would get, based on the size of each operation and its financial aspects. I said no negotiation on this. Refusing to negotiate is usually the wrong way to negotiate. You never negotiate from an ultimatum. But I had no choice. It would have been a disaster otherwise--17 people saying, "I want to talk to you, Tom. Can I talk to you?"

Some people didn't really make up their mind about how they were going to vote on the proposal until it was time to go around the table. Some of them clearly saw the opportunity, but the franchisees were harder sells because they were more independent. Ultimately, they all agreed. I think there was a certain amount of peer pressure, concern about being out there alone, particularly with the guys that weren't really solid with their computer knowledge.

Right after the consolidation, we found ourselves in a cash-flow crisis. We had built up our sales force substantially, which was expensive. I think we paid ourselves a little too much, and in the crunch all 20 of our corporate officers had to go about six months without getting paid. Time solved the problem. Our financial statements got better. Unfortunately, some of the former partners and franchisees didn't like being vice presidents and reporting to someone else. Some people left voluntarily. A couple retired. And quite candidly, after we went public, we asked some to leave.

We went public in August 1983, in just under five years, as I'd promised. In some ways it was a relief. My responsibility shifted from the people I brought into the organization to our new public status. I could run things very objectively. Before, they were all my friends. Once we were publicly traded, I knew that whenever I made a decision, it was for the overall good of the company.

There have been a number of keys to our success, some by choice and some by chance. We picked a great marketplace. We were a pioneer in payroll processing for very small companies. And we had the perseverance and good fortune enough to stick it out. The market is huge and continues to grow. With nearly half a million clients today, we still have only about 7% of the market. So we've got a long way to grow.

Instead of rushing to offer new services, we focused on expanding geographically first. We had models for success in a certain number of cities, including Rochester. So it was very easy to duplicate them in other metropolitan areas. I had to withstand the pressure from employees to create other products. They're always saying, "Why can't we sell this?" But when I picked up the Wall Street Journal, it seemed as if there were a lot more unsuccessful diversions than successful ones. So I'd say no. Once the base got significant enough, we developed new services like 401(k) record-keeping, and it was very easy for us to make them profitable and of consequence pretty quickly. It's what I call walking the management tightrope, blending creativity with staying focused.

I think my role is pretty straightforward: Keep the engine moving. That's a lesson I learned from my father. He was in business after World War II, converting coal furnaces to oil and gas. That was a boom period for that type of situation, but it lasted only as long as people made the conversions, and the market sort of dried up. Things went sour for him, and the family had to go through bankruptcy when I was a teenager. It was, shall we say, a very awakening experience. I don't think I realized it at the time, but I learned from it. To be able to maintain a business, stay ahead of the marketplace, have competitive products, and have them priced right--all that is so important, because everything is dynamic and moving so fast. I don't think my father was able to adapt to the changes. He obviously should have found new ways to market and sell a more current product.

Learning how to run a business like Paychex was good preparation for public office. I have run for New York State governor three times against George Pataki, most recently in 2002, because somebody had to do it and nobody else seemed to be volunteering. When it comes to finance, New York State is right next to the word "chaos" in the dictionary--$12 billion deficits, 19 consecutive years of late budgets.... Some people wouldn't care like I do, but this is where I live, this is where my business is, this is where my family is--I expect to be here forever. It's natural for me to care.

During the last campaign, I found that there are some major differences in politics and the business world. There's a much higher level of integrity and ethics in the business world. I think part of the reason is that you can have multiple companies in the same industry be successful. An excellent example: ADP and Paychex. We compete head to head, but we've both been very successful. In politics there's a winner, and everybody else loses. That creates a nonethical atmosphere, because the stakes are so high.

I bought the Buffalo Sabres hockey team this past spring as more a community service than anything else. They're very important to western New York, specifically Buffalo. The community had a big investment in the arena. But I am trying to instill the same mentality we have at Paychex of successfully serving three masters: clients, employees, and shareholders. It's very different from Paychex. There's quite an age range: There are 20- and 21-year-olds and a 40-year-old. That's a wide range of maturity and life experience. But the more I talk about these things, the more it makes sense to people. I enjoy what I do. I just have to make sure it doesn't affect Paychex too much. And I wouldn't rule out running for governor again."