In reviewing a yet to be posted, “Mistakes I Have Made in the Last 60 years in Business and the Lessons Learned”, I have extracted the specific mistakes small business owners can and should avoid, as follows:

Not sufficiently understanding the needs of the customer

Privately owned companies are created or acquired by entrepreneurs with a desire to have a greater control over their destiny than is the case with employees. The business is frequently limited by the personal and financial resources of the business owner. The mistake is that the decision-making focus of the business owner is inward, rather than being outward, and based on the customer’s needs. What is it that targeted customers want and need? Is it a new and better product or is it a similar product, available in more convenient form and at a lesser cost? Surveying the prospective customers, personally or through others, is necessary. Once the customer’s needs are understood, the business owner can seek to create or obtain whatever is wanted by the customers.

Underestimating that necessary to create or improve the business

 It is frequently easier and less expensive, in terms of ownership retention, to raise capital in advance of initiating an action, than to raise it as needed to complete an action. Many of those who have the mindset of entrepreneurs, who believe that they can overcome obstacles as they arise, fail to accept the truism that most of that which is planned, will take longer and therefore be more expensive, than had been anticipated. Those contemplating projects requiring funding should seek independent assessment of what will be necessary to complete the project. Guesses by the business owner of the cost, which usually means time, to complete the activity, are likely to be wrong. Being wrong is either going to be fatal or expensive. It is much better to be over capitalized than undercapitalized.

Not recognizing the importance of acquiring and retaining the right people

The personal characteristics of the business owner is of varying importance depending on the type of business. The positive personality of the business owner in a service business, where there is direct customer contact, is vital. However, if the business is manufacturing or distribution-based, the customer is buying a different product. In all cases, the business owner should attempt to match the customer’s needs with the characteristics of the person the customer sees. Hiring employees because they are liked by the employer is not the best approach. Accommodating the job function requirements and the existing or trainable skills of the employee is the objective. The business owner’s challenge is to retain the best employees, without becoming dependent on the individuals. The customer relationship should be structured to be with both the company and the individual. If the relationship is primarily with the individual, other than the owner of the business, there is likely to become first a reward and then a retention issue. Therefore, the business owner should have a relationship with the important customers of the company, irrespective of the preference of whomever else is responsible for the customer contact.

Not having a plan for an unexpected change

Customer needs or customers can change. Revenue levels can be significantly impacted. Closing the business may be the only realistic course available. If such a disaster is possible, a plan should be in place which will limit the loss for all concerned. However, it would be advisable to consider in advance who might want to acquire the business, including some or all its employees or what other business opportunities there might be which could benefit the entity which had been created, but focused on a different customer body. Similarly, what if a key supplier of product or service, becomes no longer available? What if there was a fire or for whatever reason the location was no longer available? What alternatives are possible? How long would it take and what would be the replacement cost? Planning for the unexpected can be a critical survival exercise.

Raising capital from those having different objectives

Those investing in a business with the expectation of profiting from the success of the business, have a different perspective than the business founder. The business founder will likely be longer-term focused on longer-term growth and customer service, whereas the investor will likely be seeking a more immediate return. The business founder may envision a lifetime activity, while the investors expect a return equal to their investment in a few years, with a buyout at some point producing a return of many times the cost of investment. The business founder will have staff education and employee health and retirement benefits as considerations as a part of building for growth, while the investor may want maximized profitability, as soon as possible. Executive compensation and other discretionary expenditures are areas to be agreed. Company governance, through a shareholder-elected Board of Directors, must be negotiated. These areas of natural conflict can be addressed by the terms of the original investment including the business founder’s ability to reacquire the investor’s position on negotiated terms. This is a commercial form of a pre-nuptial agreement, contemplating the possibility of relationship dissolution.

The foregoing are the significant mistakes and possible solutions I have witnessed and been involved with, and which tend to reoccur in many small businesses.

 

Arthur Lipper, Chairman                          arthurlipper@gmail.com
British Far East Holdings Ltd.

 

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