Obviously, most people starting a small business are hoping for success and anticipating that their hard work will pay off. But, what if the business ends up like over 50 percent of other small startups and doesn’t make it past 3 years? Or even past year one? What are some ways to prepare for if things don’t go exactly to plan and hard times become inevitable? How can a person prepare best for good situations as well as making sure bad ones don’t get too out of hand? What can be done to soften damage done by unanticipated road blocks and struggles? Putting all of your chips into a single small business is often times necessary, but very risky. What are some tips for limiting the overall risk of starting a small business?
Drew, great thinking. A friend of mine at the Kellogg Graduate School of Management, Lloyd Shefsky, likes to say that entrepreneur is spelled O-P-T-I-M-I-S-T. We live and breathe just knowing that we have the right idea and that we’ll hit the jackpot. But we often don’t, of course. According to the SBA, more than half of all businesses fail in the first year and 95 percent die within 5 years. How’s that for optimism buzz kill?
So, the trick is to stay optimistic and positive while also recognizing that you have obligations. For instance, never, never, never put your family at risk. Tempting as it might be, I would never put up my house as collateral against a business loan; I refuse to be that much of a dice-roller.
A few ground rules on this might help protect you:
– Pay yourself. I like growing my business as much as the next guy, but my kids like to eat too. Once you go down the path of using your own pay to finance the business, it instantly strains your family. Besides, if you are creating a business without paying the top people, it’s a fictional accounting game anyway and long-term unsustainable. I’ve seen lots of people try this, and very few succeed.
– Set up a smart corporate structure. I like LLCs and S corps for this reason. As a sole proprietor, you put your personal side at more risk. An LLC or S structure allows you to take more business risk and less personal gamble.
– Keep expenses low and manage your cash. While we all like to say that the recession is the main reason that businesses fail, it’s just not true. Businesses die in good times too. Debt and mismanagement are the two biggest reasons, as many business owners build too big a cost structure. Then when something goes wrong — a client walks away or it rains for two straight weeks – you find yourself short of cash. Just as you have a rainy-day fund in your personal life (or you should), you need one for your business.
– Look at why businesses fail. A great way to avoid mistakes is to know what to look for. I think Dave Lavinsky has a smart piece on why companies fail: http://www.growthink.com/content/6-untold-reasons-why-businesses-fail
Good luck, Drew. Stay positive.
