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Launching a High-Cost Biz the Low-Cost Way

Don't ante up a fortune when launching your biz. These three entrepreneurs found success on the cheap.

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For most people, the idea of starting a business roughly equatesto the idea of emptying your bank account, thumbing it to Vegas,and betting every penny on one hand of blackjack. You might be ablackjack guru; you might have even won big in the past. But nomatter how carefully you plan, no matter what your cards lookedlike before, and no matter if the dealer tosses you an ace--youcould still go bust.

That alone is enough to halt many would-be entrepreneurs intheir tracks. Factor in the empty-bank-account factor, though, andmany startups don't even make it out of the gate.

Would it surprise you, then, to know that sometimes your carefulplanning, meticulous business plan and brilliant marketing ideasdon't have to go to waste--and don't have to cost afortune? "I know it can be done. And that's one of thefirst things people need to understand," says John P. Hayes,co-author with Fred DeLuca, Subway's co-founder, of StartSmall, Finish Big: Fifteen Key Lessons to Start--and Run--Your OwnSuccessful Business. "It's not money that's in theway of you starting your business. It's a mind-set."

Even if your startup aspirations are as lofty as a fitnesscenter, a car rental business or a hotel--not typically thecheapest businesses to start--you can start small without breakingthe bank. (The big-growth part comes later.) So pull up a chair,and shuffle your own cards. Your next hand could just hit 21.

Starting a Fitness Center

It's a good thing Tom Hatten was just 21 when he startedMountainside Fitness in 1991. He needed all the energyhe could muster to put together his Chandler, Arizona, fitnesscenter--not to mention the energy to wash gym towels at home'til 2 in the morning for the first year, until he could afforda washing service. "I worked 100 hours a week and kept myother job [painting houses] for six months," recalls Hatten."As much stuff as I could physically do [myself], Idid."

That self-starter approach is what helped Hatten stretch the$2,000 he had in his pocket at startup as well as the $15,000 heborrowed from a friend and another $15,000 from his local bank,where his good credit on a car loan served him well. That $32,000covered computers, advertising, and about half of the equipment forthe 4,800-square-foot facility; money for the remaining equipmentwas raised through membership pre-sales totaling $12,000.

How did Hatten, 36, manage to equip a gym on a budget? "Ibought all used equipment," he says. "Just clean it up,get it painted--get ones that have warranties. If it doesn'tlook shoddy, members only care if it works."

While cutting costs is important, it shouldn't be your soleconsideration. "Instead of cutting costs, it's best justto make a wise investment," says Jon Giswold, an author,industry veteran and founder of JMG Management, aNew York City fitness-center management company. "Do someresearch. Investigate what it would [cost] to buy directly from themanufacturer. They'll tell you if you can get a better price ifyou buy directly."

Before you consider buying machines, though, think about yourlocation. "I put my club where there was no competition,"says Hatten, who now has five clubs with sales totalingapproximately $7 million, 400 employees, and a membership roster21,000 clients long. "From there, I tried to give a lot ofservice that wasn't [standard] in the industry"--such asno contracts, no reservations for child care, parents' nightout, free family day on Sundays, and other perks.

Giswold advises you to take a careful look at the space in yourclub: "Look at the floor layout," he says. "Domachines consume the whole space?" Is there enough room foryoga or ab work? With elliptical trainers being so popular, do youneed a lot of stair-climbers? "Really what people like to useis a treadmill," he adds. "They're always used--withthe second [most popular] being elliptical machines."

Once you decide on machines, arrange them logically--even noviceusers should know what to do. "If you start at one end and tryevery machine in succession down the line, [you should get] a goodworkout," says Giswold, noting the success of the Curvesconcept.

Deciding whether to offer classes, child care and other extrasdepends on your available startup funds and your appetite forgrowth. Check out the local competition's offerings, and gofrom there. Says Giswold, "What I've seen is that the bigclubs are offering services, like certain classes, for additionalfees."

Yes, you will break a sweat getting started. But ask Hatten, andhe'll tell you it's worth it. "You gotta love what youdo, because you're married to it," says Hatten, who hopesto open three more clubs in Arizona and then expand his businessout of state.

Starting a Rental Car Business

Renting a Dodge Viper in Maui in 1997 wasn't enough forSteve Bandovich. When the 35-year-old Roselle, Illinois, founderand owner of the one-person Cloud 9Specialty Car Rentals returned from his Hawaiian vacation, hedecided Chicago sorely needed its own specialty car rentalservice.

One perk of starting a car rental business is that you can startfrom home, as Bandovich did, with just one or two vehicles.Bandovich took out a $50,000 home equity loan to purchase a used1996 Dodge Viper GTS, which he later replaced with a Dodge ViperSRT-10. He has also added two Hummers and a Porsche 911 to hisfleet. With another $12,000 of his own money for attorney andaccounting fees, a computer, advertising, and other various startupnecessities, getting started in 2001 was relatively smooth forBandovich--until it came to insurance. He says, "Finding acompany that would insure me for liability and collision--that wasa major hurdle."

Experts agree, insurance is one of the biggest challenges inthis industry. Insurance brokers are looking for "lossexperience"--an indication of how much premium you paid duringa given year and what your loss ratio was. "It's verydifficult to get insurance when you don't have any lossexperience," says Rocky Dellapenna, founder and owner ofPaoli, Pennsylvania-based ChampionEnterprises, which rents both standard and high-line cars viaChampion Car & Truck Rental and Champion Exotic Car Rental.

Short of buying into a franchise program, where the insuranceand financing are already in place, Dellapenna--an industry veteranof 30 years--advises buying an existing business. "If you wereto buy an established [business], then they would turn you rightover to their insurance services, broker and so forth," hesays. "As long as you had good credit and good backing, youcould step right in and go turnkey."

Bandovich didn't need to go that route. He's got fullcoverage, at about $200 to $500 per car, per month. But operatingin Chicago, he does have to plan for the inclement weather thatkeeps many people off the streets--not an issue for those in warmclimates. "Our Hummers help get us through the winter,"says Bandovich, who brought in more than $100,000 last year and isshooting for $175,000 in 2004.

Bandovich's secret is operating lean. He spends $150 a monthon rent for his office space and less than $200 a month onadvertising. Marketing tactics have included driving the Viper tocar shows and handing out a few thousand business cards.

Remember, if you decide to operate a standard car rentalbusiness, you'll be marketing to a different kind ofcustomer--one who needs to rent a car, not one who wants to drive anice car just for kicks. "With car and truck [rentals], thefirst thing people do is go to the Yellow Pages," saysDellapenna--and that kind of advertising can cost upwards of $9,000annually. "But you have to have an Internet presence forhigh-line cars. People look for it there."

So what's your best bet--cars and trucks, or Vipers andHummers? "There are more people renting the high-line carsright now," says Dellapenna. "They figure, [that] insteadof going out and buying one of these expensive cars...they'drather rent one for a weekend or a week."

Starting a Hotel

If interviewing Chip Conley during his vacation in LakeTahoe--on the California-Nevada border--is too much of acliché of how your life could look, then call us pedestrian."It's important to have time off. The first couple ofyears, I didn't get enough of that," says the hotelier,who started his hotel management company, Joie de VivreHospitality, with just one hotel and now operates 30hospitality businesses in Northern California, 25 of which arehotels.

What was once a "no tell motel" became The PhoenixHotel in 1987, when Conley was 26 and itching to create a haven forhip young travelers, artists and musicians on the road. Buying thespace for $800,000--a bargain in hotel terms--Conley then spentabout $200,000 on renovations. Four months later, The Phoenix Hotelwas ready to show its new face to San Francisco. "Wecompletely cosmetically renovated the hotel," says Conley, whoraised the money from friends and family. "Every room in thehotel was dedicated to an original San Francisco artist."

Conley appealed to a youthful niche audience with amenities suchas a massage treatment room, where musicians could work out theirpre-performance jitters, and an "underground" SanFrancisco guidebook for every room. After achieving first-yearsales of $600,000, Conley pressed on, opening his second and thirdhotels. By 1990, sales had reached $3 million; and between 1993 and1997, Joie de Vivre grew from three to 13 hotels. Now it's a$75 million company with 1,000 employees.

That success is due, in part, to Conley's decision to buy anexisting hotel. "It's usually too expensive to start fromscratch and make it work," says Conley, 43. "It'sbetter to cosmetically upgrade something that's already beenthere."

"Unless you're an established developer or a hotelcompany, building something from scratch is probably not the rightway to do it," agrees Gregory Peck, a hotelier whosebackground includes investment banking, real estate investing, andhotel development and management. Peck, who put his hotel and realestate background to use in 2001 with the purchase and renovationof The Beverly Crescent hotel in Los Angeles (now called The Crescent),recommends acquiring a property for "less than replacementcosts." According to Peck, "You're dealing with olderbuildings and the limitations imposed by these properties, butit's cheaper and a simpler process."

Not that starting a hotel is simple. "It's a daily,24-hour-a-day responsibility," says Peck. Another hurdle:local zoning restrictions. "We didn't understand how longit would take to get the city to approve what we wanted todo," he says. "Read the fine print and the details. Sitdown and talk to people who might know about what you'redoing."

Finding a niche will set you apart from big chains--you'llcater to a market that's looking for something beyondrun-of-the-mill. "Every one of our hotels has a differentpersonality," says Conley. Every time he creates a hotel, heimagines a magazine and five words or phrases to describe thatmagazine--for instance, for The Phoenix Hotel, it was Rolling Stoneand "funky, irreverent, young-at-heart, cool,adventurous."

"The most important thing is to create a positive memoryfor the guests," says Conley. "You need to think abouthow you can create a compelling and remarkableexperience."


Karen E. Spaeder is a freelance business writer in SouthernCalifornia.

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