Small business ownership is a journey that both enlightens and overwhelms us. It is exciting — even exhilarating — and yet at the same time, few people around us (other than fellow entrepreneurs) can appreciate the true complexity of creating, building and managing an enterprise, day in and day out.
Considering the overwhelming effort and enormous personal and financial commitment involved in business ownership, it’s truly critical that business owners carefully and diligently avoid pitfalls that can cause serious (or permanent) damage to their business. The first step to avoiding danger comes in properly identifying it and knowing the signs of trouble before they become overwhelming.
Perhaps the greatest kind of danger to a small business is inaccurate or imprecise assumptions made by the owner. With that in mind, here are six serious mistakes that many small business owners make — and which, with proper planning, you can avoid:
1. Thinking you already know the value of your business.
First, many small business owners simply don’t bother to think about the value of their business at all, other than in the intrinsic sense of its value to them personally. Second, those who do theorize about the value of the company often make wild assumptions that are dangerous and lead to misguided decisions.
The value of your business ultimately comes down to what it can be sold for when you’re ready to sell (and when the business is positioned successfully for sale). Then again, selling a company isn’t just about when and how you’re ready to sell — it’s also about when and how someone else is ready to buy.
Market shifts, economic factors, and the sheer number of other people like you who are also planning to sell similar companies in a similar timeframe, all work against you. If you were to sit at a table with the CEOs of your competitors, would they all be about the same age as you are? Then remember that when everyone in the neighborhood decides to sell their house at the same time, only buyers win – and that without careful planning, you’re liable to find yourself in a fire sale rather than a strategic one.
Understanding the factors that impact your business and its value (both internal factors and external ones), can guide you to make far stronger decisions about how you structure the business, invest in its growth and plan for exit when it’s best for your financial goals.
2. Assuming that being busy in the business means you’re fine.
The old adage about working on the business and not just in the business always rings true — we all know that we need to spend more time working on the business overall, and not just bearing down in the weeds.
But there’s another point here worth nothing that’s even more important, and that is that if you’re spending all of you time being busy in the business, that also probably means that the business is dependent upon you day in and day out…or at least, that everyone in the business assumes that it’s dependent upon you. Perhaps the business can survive a day (or even a week) without you guiding every decision — but have you trained, empowered and assigned staff to take on those roles successfully?
If you haven’t, you’re in serious trouble because you’ve built a business whose risks are tightly tied up in your own health, wealth and wellbeing. That’s not good when you’re ready to sell, and it’s also incredibly dangerous every day that you fail to address it.
3. Convincing yourself that you’re safe from unexpected crises.
Speaking of risk, consider that the likelihood of you becoming disabled prematurely as opposed to dying prematurely varies between 4 to 1 at age 30 to about 2 to 1 at age 50. That means that throughout most of your life as a business owner, you’re about three times as likely to be sidelined by a disability than you are likely to die prematurely. And yet, how much have you thought or planned for the more likely of these two scenarios? Furthermore, as a business owner your personal disability could destroy the very enterprise that pays for your health insurance and allows for your care to be provided in the first place.
And that’s just the beginning. No one likes to dwell on negative possibilities, but it’s very likely that your business will experience one or more of the following during its lifetime:
- A serious accident or lost-time incident
- An employee who is dishonest or embezzles
- Workplace disputes or disagreements that result in a legal conflict
- A tax audit, the calling of a bank loan or other financial crisis
- Environmental emergency or national security emergency
- A customer or vendor lawsuit or contractual conflict
- Unexpected injury or incapacitation of one or more key persons
- Financial or legal dispute between owners or shareholders
- Customer bankruptcy or nonpayment resulting in a cash flow crisis
These are just some of the most common issues that small business owners address every day. Consider that when United Parcel Service (UPS) employees went on strike for 16 days in 1997, the strike lasted two days longer than the amount of time that most UPS Store franchise owners could keep their business functioning with available cash on hand (an average of two weeks).
Note: In 1997, the UPS franchised retail store network was named Mail Boxes Etc. (MBE).
4. Thinking that time is on your side when it comes to the future.
Whether it has to do with retirement planning, investments, estate planning, taxes or insurance — time is, unfortunately, not on your side as a small business owner. Considering the risks that we have just noted, this is particularly true when it comes to succession planning or otherwise operating and managing the business in an emergency or unexpected circumstance.
One of the top reasons why small businesses fail to continue as going concerns after the owner’s retirement is due to lack of formal planning for retirement and succession. This is particularly short-sighted when you consider that many buy-sell agreements include extensive provisions tying the owner and key personnel to the business for a period of time after the sale, as well as those requiring that the business continue generating a certain level of revenue and profits in order for the seller to continue receiving his or her payments after the sale closes.
5. Presuming that your business will be the key to your successful retirement.
A business is not a retirement plan. A business is an asset that, under carefully defined and cultivated conditions, can become a significant contributor to your retirement. Nonetheless, your business is an investment and you need to view it as one investment among many so that you create both a healthy investment portfolio and a diversified one that reduces risk exposures and generates reliable returns.
This also serves as a hedge against unexpected market-based factors that can impact your business. In addition, it can help reduce your susceptibility to “golden goose” syndrome, where you routinely fund your personal lifestyle out of the company’s earnings and, over time, drain the company’s cash and reduce your ability to rely on the business after retirement anyway.
6. Ignoring the importance of proactive tax planning.
Whether we’re talking about this year’s income taxes, last year’s sales taxes or future estate taxes, the fact is that tax planning is utterly essential for small business owners. You often have the most to lose by not planning carefully for taxes, and the most to gain by creating an effective tax strategy. And for entrepreneurs, the differences can be dramatic. Failure to take advantage of an applicable deduction or accurately declare an asset can cost you tens of thousands of dollars, or more — seriously impacting cash flow and potentially threatening your viability.
These six considerations are serious and established points of risk, and they all begin with a flawed assumption on the part of the small business owner. Avoid the dangers these pitfalls represent by being proactive and strategic today, in planning for the future tomorrow. Both you, and your small business, will be stronger and better positioned for success as a result.