IF YOU CAN LEARN from other’s mistakes, you have a better shot at success. Lawyer, CPA, and serial entrepreneur, Patrick Burke, says he has made most of these big mistakes and has (barely) lived to tell about it. He chronicles them in .
Some of the lessons learned are timing issues. Some seem like common sense, but in the heat of the moment and the hubris that often accompanies entrepreneurship, these lessons are easily forgotten. The uncertainty and the need for resources lead many into mistakes. Slowing down and thinking about these things will increase your odds of success. Here is a brief overview of the wisdom Burke offers:
Mistake #1: Buy or Start the Wrong Business
It’s not a bad business, it’s just not your business. The most critical element in a business’s success is a sustainable advantage. If you are the sustainable advantage, be careful. “Many is not most small businesses are (or at least start out as) personality cults. There’s nothing wrong with that, but a cult is not sustainable. If you are buying a business, make sure it’s not based on the last personality. “If you’re starting your own business, create processes that allow others to be you so you can successfully scale.”
Mistake #2: Lifestyle
Lifestyle businesses are not inherently bad. “The problem occurs when a business could be a growth business and should be a growth business but instead is starved for cash because the owner is treating it as an ATM.”
A good lifestyle business coupled w2ith smart investing will result in financial security, but not real wealth. Real wealth results from building a growth business with a sustainable advantage that can someday be sold at a high multiple of earnings.
Mistake #3: Professionals
Hire professionals with the expertise required for what you are trying to do. “There is no reason to continually learn from your won mistakes when you can draft off professionals who can prevent them. You should always be willing to pay for and follow great advice. Paying for advice is a capital investment in a valuable piece of mental machinery.”
Mistake #4: Partnering
The gold standard for taking on a partner: “A business owner should bring someone in as a partner only if that person possesses a skill that is absolutely critical to the success of the business and that skill cannot be acquired for money alone.” Treat the equity in your business as your most valuable asset.
Mistake #5: The Wrong Team
Most entrepreneurs hire too fast and fire too slow. “Most entrepreneurs are imbued with a super-strong work ethic and boundless optimism. They truly believe they can transform employees, even those with below-average skills and drive, into valuable players through their excellent example and the sheer force of their iron will. This is patently not true.”
Mistake #6: Think Big
Johann Wolfgang von Goethe is said to have written, “Dream no small dreams for they have no power to move the hearts of men.” This should inform your business decisions. “If what you’re doing is not leading you to your destination, you may be thinking too small.”
Mistake #7: Close Too Soon
Develop a good cash forecast prior to opening the business, one that can survive a downturn in the beginning. If you are successful in building a brand, “even though the business is not yet profitable, it should continue. A brand is the ultimate sustainable advantage and should be fully exploited.”
Mistake #8: Close Too Late
Avid the sunk cost trap. Once you have invested so much time, effort, and money into something, it’s hard to let go. Many entrepreneurs persist beyond the point where the odds of success are in their favor. “The impulse to throw good money after bad to prop up a failing business is extremely common. In my opinion, this impulse has resulted in more business losses than any other factor.”
Since sunk costs are irretrievable, it’s nest to act like you have only the present and the future—because you do. With that in mind, it’s easier to detach yourself emotionally from your past decisions.
Mistake #9: Sell Too Soon
It’s hard to get the price you want when you want to get out. “The idea that the price paid for companies is based on past performance is only partly true. However, the idea buyers will actually pay for tomorrow’s potential is mostly wrong. By far, the most important data to a buyer is current performance and, based on the company’s processes and metrics, how predictive that is of future performance.”
And keep this in mind too: “If your company is too early in its life cycle to attract more than one potential buyer, negotiating will be impossible because the only alternative is no deal.”
Mistake #10: Sell Too Late
Timing is everything. Greed is sometimes the reason owners stay too long; trying to get a few more years of profit. Some “wait until their energy and passion are waning and then take their business to market. At that point, the business is generally in decline if not fully distressed.”
I have been advising clients for years not to pay for potential when acquiring a small business. I suggest that a seller’s puffing about new opportunities, products, and services be countered with pointed questions about why those ideas haven’t already been implemented.
If your business is a lifestyle business, stick with it as long as possible and then close the doors.
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