5 Small Business Mistakes You Must Avoid

In recognition of National Small Business Week, we look at what a bankruptcy lawyer knows about business.

Everyone tells you what to do to succeed in business; you also need to know what not to do if you don’t want to fail.

Running your own business is the classic American dream. It’s romantic and heroic.

The romance of self determination, market recognition, and profit obscures the fact that the overwhelming percentage of small businesses fail within 5 years.

I love entrepreneurs. They are creative, determined, skillful, and incredibly hard working. And still they fail.

Those failures represent not only dashed dreams, but financial pain. That financial pain is personal pain as well.

No isolating business debt from personal assets

In thirty nine years as a bankruptcy lawyer, I’ve found themes in why they failed. Here is my list of five behaviors tied to business failures.

They plan only for success

The business plan assumes steady straightline movement toward growth and profit. A typical plan may start small and project growth. But it doesn’t plan for setbacks.

What if it takes twice as long to get a toehold in your market?
What if capital costs more than you think?
What if your pricing model craters?

Before you take the self employment plunge, you need to assess your ability to survive if your rosy plan for success is off by 25%.

The entrepreneur loves the craft, but not the business

If you’re a great carpenter, a great cook, or a great lawyer as an employee, it’s tempting to set out to ply those skills for your own benefit. Run your own business, the way you think it should be run, and make more money doing what you do well.

When you go into business, you wear two hats: the skilled professional AND the business manager.

Many business failures are grounded in the entrepreneur spending all his time on the craft, and less than the bare minimum on management.

Employment laws are ignored, bank accounts aren’t balanced, taxes are postponed.

To be a success in business, you need to attend to business, or to partner with someone who loves the business side of things.

They pay too much for existing business

Buying an existing business seems like the answer to all the start up difficulties. It’s a turn key operation, often coming with some transitional help from the seller.

And, all too often, too good to be true.

The first question to ask is why the business is for sale.

Frequently, it’s because it isn’t really making it. It may be paying the expenses of operation, but it isn’t actually supporting the owner who works there. The hours are too long, the challenges larger than the rewards, and the owner wants out.

Ask yourself, why you want in under those circumstances?

Ask, too: are the books up to date? Reliable?

Another motivation for sale is that the sellers want to retire and they see the business as their retirement plan. To substitute for retirement savings, the selling price needs to be generous.

Is the business priced at what the sellers need, or what the business as constituted is worth?

No profit if financed on credit cards

Credit cards are associated with consumers and household budgets. But all too often, new businesses are started on the owner’s credit cards.

The myth of the business credit card

Plastic is pitched to small business owners as either a convenience, a status item, or the bedrock of business operations.

It’s really hard to make a profit if your seed capital requires interest payments at 22%.

Also, far from simplifying business bookkeeping, credit cards obscure the fact that the debt service you pay on the credit card this month is really paying for a fraction of last month’s costs of operation.

Credit card payments become their own line item in the budget rather than simply a means of paying for inventory or services required last month.

They gamble their retirement on business success

When your retirement account is the only hoard of money you’ve set aside and you want to go into business, the temptation to draw on your retirement to make it happen is almost irresistible.

You tell yourself you are making an investment in your future.

When you do that, you break one of the basic rules of investing: diversification. You have put all of your retirement “eggs” in the business basket.

If the business fails, you have neither a livelihood nor a nest egg for old age.

The phenomenon is not confined to those just starting in business. Too many folks in my bankruptcy office to deal with a dying business tell me that the business was their retirement plan.

Instead of setting aside earnings for retirement, they plowed their money back into the business.

They expected to sell it to retire.

And now there’s nothing to sell.