THE NEW FACE OF SMALL BUSINESS ''A tremendous shift to self-employment is under way,'' observes one economist. Before you try it, prepare, prepare, prepare.
By Brian O'Reilly REPORTER ASSOCIATE Patty de Llosa

(FORTUNE Magazine) – FOR DECADES, half the working population of America has been confiding a secret desire to drinking buddies and pollsters: to yank off that corporate uniform, deliver a crisp farewell to the boss, and go into business alone or with a friend. Until recently, worried parents and horrified spouses squashed the dream flat, touting the security and prosperity of working for a big company. No longer. ''A tremendous shift to self-employment is under way,'' observes Bruce Kirchhoff, former chief economist at the Small Business Administration. Among two million new businesses formed last year that Dun & Bradstreet evaluated, 20% were one- and two-person operations, significantly more than in the past. Analysis of recent poll data by Marquette University professor Paul Reynolds indicates that more people are actively laboring to start their own business than are getting married or having babies. Some of the boom is driven, of course, by employees weary of the downsizing at large companies. William Morin, head of the outplacement company Drake Beam Morin, says that in 1987 only about 3% of people who lost their jobs went off on their own. Five years later the number had tripled. Most folks going into business for themselves are eager, but not desperate. Madelyn Hochstein, head of DYG, an opinion polling company, says people are seeking a better quality of life than they can find at big companies. For ''quality of life'' read ''independence,'' not leisurely workdays or fat incomes, which are in laughably short supply among the self-employed. ''There's a sense that you won't make a lot of money, but you'll have more security, and you're part of the action,'' says Hochstein. ''It's part of a big structural change in how people work, and we think it will continue.'' The new small-business people are better educated and their businesses are more sophisticated than in previous generations. Richard O'Sullivan, a small- business economist in Acton, Massachusetts, says 64% of people starting a business have some college education, and 16% have advanced degrees. Their companies are less likely to be Main Street startups like shoe stores or candy shops. Increasingly, they are businesses that provide consultant-style services to other businesses. This is occurring in part because small service companies have begun to get respect from big outfits that once disdained them as unsophisticated. Newly lean big companies, which don't always have the staff they need, are discovering that tiny firms are surprisingly capable -- and cheap. Inexpensive computer and communications equipment has made it far easier for the Lilliputians to deliver skilled services with far less overhead than bigger providers. And the proliferation of computer networks may wreak the most momentous change yet in the economics of being small: Giant companies can quickly find the talent they need from small companies by trolling on the Internet (see box).

A rough guess by people who work with ex-corporate types suggests that about half of those who go out on their own enjoy it. Phillip Kelly resigned as chairman of the Marshall Field stores in Chicago years ago to open a men's clothing store called Mallards. How different was it? Professor Gerald Hills recalls Kelly's response to business school students at the University of Illinois: ''Well, as chairman of Marshall Field I didn't go into the back alley and unload trucks.'' Unfortunately, despite Kelly's effort, Mallards went into receivership in 1992. | Many executives accustomed to the scale and pace of a large company find a small one too small, even when business is good. Robert Bogart, 49, formerly senior vice president for human resources at Primerica, lost his job when Primerica merged with Commercial Credit in 1988. He and a friend opened All the Fax, a company selling facsimile machines and related services, in Stamford, Connecticut. Says Bogart: ''Business was good, but after a year I decided it wasn't for me.'' The dissatisfactions gush from him as from a fire hydrant. ''As an executive in a large company, the issues are strategic,'' says Bogart. ''You're implementing programs that affect thousands of people. In a small business the issues are less complex. There's no administration. No maintenance. There's no executive secretary because you can't afford the $40,000 she costs. You miss the seminars, the lunches, the trade groups. You worry about inventory every day, because you may not be in business next week if you have negative cash flow.'' The most unpleasant surprise for Bogart was ''how much you have to sell. You're always out selling to companies and law offices. I didn't want to be a salesman. I wanted to be an executive.'' Bogart sold his share of the business and in 1990 became a senior vice president at Macmillan. Even though he lost that job in 1993 when the publishing company ran into trouble, he still says he'd rather be on Park Avenue, looking for work, than on Main Street. If you are determined to go into business by yourself -- or foresee an unwanted shove off the corporate gangplank -- prepare, prepare, prepare. There are palpable differences between the little companies that succeed and those that fail. The most obvious, according to a study by AT&T, is that a small business with a plan is far more likely to make it than one without. Says Raymond Boggs, an economist at BIS Strategic Decisions, a business research company in Massachusetts: ''Whether the plan calls for fast growth or slow doesn't matter much. When you do a business plan, you're forced to make your assumptions explicit and to challenge them.'' DON'T PRESUME that a successful corporate career has given you what you need to succeed. Richard Buskirk, a retired professor of entrepreneurship at the University of Southern California, teaches laid-off defense company workers how to go into business for themselves. Says he: ''They're all bureaucrats. I can't discover anything they've learned at these companies that is a marketable skill.'' Sometimes, though, even an arcane corporate talent can come in handy. When Monica Castaneda, 33, lost her defense contract administrator's job at TRW, she bought a dormant business from a friend that made flame-retardant flight suits for test pilots and embroidered uniforms for racecar drivers. ''I thought I'd spend all my time sewing,'' she says. She does hit the treadle herself sometimes, but increasingly others do it. Says Castaneda: ''What I'm really good at is administration and taking care of contracts.'' If essential skills don't come naturally, you must master them. Seija Goldstein, a solo financial consultant in New York City, struggles with marketing all the time. She has no problem handling the technical side of her work; she was director of acquisitions for the magazine division at CBS before it was sold and was CFO at a smaller publisher until it, too, sold most of its magazines last year. And while her work -- helping a half-dozen regular small clients with nonroutine financial problems -- is interesting, Goldstein, 46, says, ''Selling is a great effort. I'm a back-office person. Making cold calls is hard for me.'' Her solution: ''Whenever I meet people, I give them a spiel on what I do.'' The strategy seems to be working. She is making more than when she was an employee and can spend time with her children during slow periods. When things go well, getting your own business up and running can be enormously satisfying. Frank Fiorentino did just about everything right to prepare for his shift from a corporate job to running a tiny mortgage bank in Taos, a rustic artist's community in the mountains of northern New Mexico. He and his wife, Elizabeth, bought land there several years ago, but at the time were in no hurry to leave Los Angeles. Fiorentino, 55, was ''very comfortable'' as marketing vice president for Monarch, a private home- furnishings maker. Even after the company was sold to Stanley Works and Fiorentino lost his job, he looked for another position in Los Angeles. He spent two years at a California mortgage bank before moving to Taos last year. All the preparation paid off, and his timing was right: A real estate boom is under way in Taos. ''Corporate America was very good to me,'' says Fiorentino. ''But I wanted to do something on my own, to apply the expertise I had learned.'' Jim Dettore had no choice but to prepare for a year before he started the Brand Institute, a New York City firm that originates names for new products and services. He had signed a yearlong noncompete agreement when he left his previous employer, Interbrand, another consultant on the subject. ''It was the best thing that ever happened to me,'' says Dettore. ''I couldn't rush out before I was ready.'' He spent weeks developing a business plan and months lining up sufficient financing. (Always borrow more than you think you'll need, says Dettore -- and everybody else. If business is slow, you'll need the money to keep afloat, and if business is strong, your expenses will shoot up before you get paid.) Dettore had lunches with the owners of small brand-naming companies to determine their strengths and weaknesses and to learn how to position himself. He bought a computer and, while composing his business plan, learned to type. He kept in touch with acquaintances who might send work his way, and once the noncompete agreement expired, asked former clients to write letters of recommendation he could use to win new business. He even solved the age-old problem facing small businesses trying to make it in big cities. Little companies usually can't rent space in prestigious locations, unless they're prepared to take thousands of feet. But Dettore found a company called HQ Inc. that leases entire floors, divides the space into dozens of small, handsome offices, and even provides secretaries, meeting rooms, and a swank reception area. Says Kathy Donohue, president of an HQ franchise that includes New York City: ''We provide instant credibility for startups.'' At the Colgate Building on Park Avenue, HQ's monthly rates are $1,500 for an inside office, $2,500 for a window, and $4,000 for a big corner office. Donohue says demand from small startups is so great that HQ's business has doubled -- to 152 locations in 106 cities -- in three years. For Dettore, the brand-naming work came flooding in -- from AT&T, Johnson & Johnson, and American Cyanamid. The demands on him now are much different than they were at his previous company. ''I have to know everything and do everything,'' says Dettore, who sometimes spends weekends at the library poring over lists of existing brand names with his vice president, Robin Niecko. ''I'm much more involved in the details. I've talked to consumers, I've done original research. My presentations to clients are more authentic, and that helps when I make sales calls.'' The odds of succeeding on your own are surprisingly good -- if you are committed to your business. Douglas Handler, an economist at Dun & Bradstreet who made a study of small companies, discovered that 80% of the ones started in 1985 were still around in 1988. Many of the small companies that appear on statistical radar only to fade away are part-time diversions. IF YOU'RE NERVOUS about flying solo, keep in mind that it's not for everyone. Morin at Drake Beam says his outplacement counselors talk about half the wannabes they see out of starting their own businesses. Psychological tests that Drake Beam gives to laid-off execs help determine who gets urged to return to the corporate fold. Valerie Ellien, a psychologist at the firm, says people who like a chain of command, clearly defined job descriptions, or carrying out orders are better suited for a big company than running a small outfit. For those who insist, the counselors often recommend buying a franchise. Says Morin: ''In effect, you're buying a new job.'' After working for six years analyzing and explaining court opinions for a legal publication in San Francisco, lawyer Victor Aron was bored. And his wife, Lindy Edward, was weary of the patients she encountered as a nurse at the city jail. Two years ago they bought a Body Shop retailing franchise for $40,000; they put another $200,000 into refurbishing a store on Chestnut Street, and then spent four weeks at a Body Shop training center in New Jersey and three more weeks training at a store in New York City. Aron was grateful for the help. ''There was a lot I didn't know about ordering, inventory, selling, and hiring,'' he says. Nonetheless, the work was so overwhelming at first that Victor's mother traveled from Chicago to pitch in. ''It was like when the children were born and she came to help,'' says Lindy. ''Starting the store was like having a baby.'' Part-time staffers quit suddenly, a robber stole money at gunpoint, and they overstocked and overstaffed for their first Christmas. Still, the Arons like what they're doing. ''We're getting the hang of it,'' says Lindy. ''We're about to open another store.'' A second store? Growth? Many small-business owners feel it's their duty to expand. But Handler of Dun & Bradstreet found that growth, at least in the beginning, is not the most important measure of success. Longevity is better. ''Companies that last three years will usually make it,'' he says. Indeed, if you begin a company to capitalize on the wisdom and personal service of a key individual -- namely, you -- big is bad. Adding staff and projects can spread the core value of your firm so thinly that customers are dissatisfied. Says David Birch, founder of Cognetics, an economic analysis company in Cambridge, Massachusetts, noted for its studies of small firms: ''In the knowledge-based service firm, there are no economies of scale.'' When computers and communications equipment were rare and expensive, a small firm might once have needed to bulk up to afford them, says Birch, but not any longer. Birch says he has a highly talented friend determined to grow a big company. ''Every time he gets a contract, he hires lots of people. He never seems to realize that his customers are hiring him, not the people around him. All his revenues get spent on the staff, which he's slow to get rid of when the contract runs out. He's always on the verge of disaster.'' Tom O'Malia, a financial consultant to small firms in the Los Angeles area, often wrestled with whether to grow or not. Not, he concluded. ''I was pulling in $150,000 a year on my own. I figured I would have to hire seven more people and increase revenues to about $800,000 a year before I would make more money. Anything less, and I would lose on distractions and layers of management.'' Adding staff can cause owners to lose control of their lives too. In San Francisco, Susan Kare designs graphics and icons for computer programs. Her credits include the little garbage can that appears on Macintosh programs. She works alone -- on purpose. ''I work more than full-time. But somebody else's mortgage doesn't force me to take on a particular job just because I need the cash,'' she says. Often it is the very smallness of small companies that makes them attractive purveyors of services to large corporations. AT&T deals with 130,000 suppliers a year. About 15,000 large and medium-size companies account for 90% of what AT&T buys from outsiders, says Patricia Cox, director of global procurement. But Ma Bell still contracts for $1.5 billion of goods and services from more than 100,000 small companies every year. ''The small companies have advantages,'' says Cox. ''Not so much in manufacturing, where capital equipment and economies of scale are important. But in services, they have lower costs, lower overhead, and they tend to be specialists.'' WHAT ABOUT the fear that a little outfit might go belly up in the middle of a project? Not a problem, says Cox, who surmises that a contract from a large company is often enough to keep a small firm in business. Sometimes the perception that small companies are vulnerable can be turned into a selling tool. Frank Gray helped start Frost & Gray, a private-detective firm specializing in financial investigations, after working as an auditor and bond salesman on Wall Street for ten years. ''I tell the banks and brokerage houses that we have to do a better job than the big investigating firms. At a big firm, guys can coast on the reputation of their co-workers. We can't coast. If either of us screws up, that's it, we're out of business.''

When Steelcase started Turnstone, a new subsidiary that makes inexpensive furniture for small businesses, it deliberately used a lot of small suppliers. ''Their dedication is intense,'' says Turnstone President James Hackett. And at Heinz headquarters in Pittsburgh, Bob Minster, head of production and planning, on occasion will turn to small outside service companies, like the one run by Cormac Kinney, a recent MBA graduate from Carnegie Mellon University. Kinney's firm developed software that helps Heinz determine how much of one product a factory should make before switching to another of the 57-plus varieties. Says Minster: ''Kinney could answer a question in a few weeks for $10,000 or $20,000. If you go with Arthur Andersen, you bite off six months and big bucks.'' Clearly, some sort of corporate entropy is at play as colossal, unwieldy organizations break down into more manageable sizes. The work they once did can often be handled best by small companies. Should you be running one? Not if your move is hasty or triggered by overwork or the undigested frustration and helplessness of a layoff. But if you have a useful, enjoyable talent that you'll never exercise by pulling on that office oar, pack up -- carefully. Now's the time.