Some businesses succeed and others fail. It would be great if there was a specific formula that could guarantee success. But given the number of variables surrounding starting and running a business, the best we can ever do is to improve the odds. Many of the basic factors that determine why some businesses succeed take place before the business even gets started.
Here are five that I came up with from my own experience with self-employment. If you’re self-employed, or have been in the past, I warmly welcome you to add to this list in the comment section.
1. The Person Committed to Being Self-employed vs. the Person Buying a Business
I sold real estate to work my way through college. It was during an ugly recession, when millions were being uprooted out of once stable jobs. Some of them were buying businesses. They were unable to get new jobs, and saw career salvation in self-employment.
Within the industry such business buyers were described as “buying jobs”.
That was an appropriate description for someone who may have worked in the same job for 20 or 30 years, lost that job, then cashed out everything to buy a business.
Such a people typically risked everything to start a business – their savings, credit lines, retirement plans and home equity. More often than not they would buy a business that was completely unrelated to their previous career experience. A factory worker might buy a restaurant or – back then – a video store, without any hands-on experience in those businesses.
It’s not hard to figure out that most of those business ventures failed. The reason was exactly the term assigned to them by commercial real estate agents – they were buying jobs.
Businesses aren’t jobs. If you start or buy a business purely as a means to earn a living, your chances of it working out are not good. There’s more to running a business than just showing up for work every day.
The people most likely to succeed in business are those who are fully committed to being self-employed. Self-employment isn’t a job but a completely different lifestyle. To be successful, you have to adopt the mindset of a self-employed person.
That means accepting risk, and the reality that you will have to go out and earn your compensation every day. Buying a cash flow doesn’t guarantee its continuation.
2. Cyclical Business vs. Enduring Business Concept
Cyclical businesses are the ones that are “hot”. I mentioned video stores in the last section; back in the 1980s that was a hot business. Video stores were opening up all over the place. And for a time, they were moneymakers. But they were also a wave. There was more than abundant evidence even then that it would be a short-lived boom, particularly since the big box stores were increasingly selling videos as well.
There are video store equivalents in every decade. A business concept starts making money, and becomes hot. Everyone gets in, the business becomes saturated, then no one’s making any money.
Hot businesses are particularly pronounced during economic recoveries. Every recovery produces its own set of “can’t miss” business opportunities. The problem is they have a very short shelf life. People get in during the boom, start making money, then everything sort of fizzles out.
For better or worse, hot businesses tend to attract a lot of activity. People who have never been self-employed, or have no experience related to the hot business, are drawn to it thinking that it’s a guaranteed money maker.
If you get into a hot business, your entrepreneurial career may not survive your first business venture. Hot businesses tend to go down quickly.
A Business Must Have a More Enduring Future
You have a much better chance of succeeding in a business that’s more permanent in nature. For example, homebuilders tend to do especially well during economic booms. But thousands of them go broke during recessions. People engaged in the repair trades however tend to keep going no matter what’s happening in the economy.
This is a critical point. If you’re going to start a business, it must be one with a very long time horizon. Do your research, and make a realistic assessment as to whether or not you think you’ll be in the same business in 10 or 20 years. If not, don’t even make the attempt.
Running a business is too complicated for a short tenure. It can take several years just to build a business up to a reasonable level of profitability. But if that business is unlikely to survive past the current economic boom, you’ll end up looking for a new business – or a new job – in just a few years. And if that happens, you’ll probably be too jaded (and broke) from that experience to try to start a new business.
3. Skills/talent Driven vs. Capital Driven
This is probably the single most critical factor in determining why some businesses succeed and others fail. It’s often thought that business success and failure is largely determined by luck. There’s no question that luck does play a role. For example, someone gets into a business at the right time, early on when the industry is growing. Another might open up a location in what later proves to be the absolutely best possible place.
But in most cases, luck is a heavily overrated factor.
It should be obvious that your best chance of success in any business will be in one that’s consistent with your skills and talents. Very few people can transition into a business that’s completely unrelated to their current or previous occupations. But there’s a relatively high prospect of success if you already have the necessary skills and talents for that business.
For example, a painter who works for a painting contractor has a better chance of succeeding as a self-employed painting contractor than an accountant or a teacher. By contrast, an accountant has a much better chance of succeeding at running a tax preparation business than a painter or a teacher.
Overcoming a Lack of Skills with Capital
Would-be business owners often try to overcome the skills gap with capital invested. This is very similar to the “buying a job” concept we discussed earlier. There’s an almost unwavering faith that if you throw enough money at something, you can make it work. But the trail of failed businesses tell very different story.
If a business is capital-intensive, meaning that it either takes a large amount of money upfront to get it going, or consistent infusions in order to keep it running, the likelihood of success is lower than a skills-driven business that requires little capital, and runs primarily on your effort and abilities.
That’s true because of the cost of money, that “little” expense that’s often ignored. If you invest $100,000 into a business, not only is the money tied up in the business, but it’s not available to invest elsewhere. That’s even more true if the $100,000 is all you have. It means you will have risked everything with a guarantee of nothing.
There are some people who make a career out of investing in multiple businesses. They often have no skills related to those businesses. But those are usually people who have deep pockets and well-developed entrepreneurial talent. Very few people have this combination.
If you do have capital that could be invested in a business, it’s almost always better to have it invested elsewhere. The capital could be a cushion against business uncertainty. And if the business does fail, you’ll still have your capital. That will give you an opportunity to make another try, not to mention less concern over the state of your personal finances. In today’s economy, is easier to run a skills-based business than ever.
Gravitating Toward Your “Hidden Talents”
Ironically, I’ve sometimes thought that maybe I’m an exception to the skills rule. I’ve never held a job in the past that involved an extensive amount of writing. And I’ve certainly never worked in any capacity where I was paid for writing. But here I am making a living as a full-time freelance blog writer. I’ve even moved beyond writing strictly blog posts.
But here’s something else that can’t be overlooked – every one of us have hidden talents.
I always believed that there was a writer buried somewhere deep inside me. When the opportunity came to write for other blogs, I readily accepted the challenge and tested my theory about my hidden talent.
That’s an important point. It doesn’t matter if you’ve never actually worked in a certain skill or business. If you have the talent nonetheless, you have a better than even chance of succeeding.
But even if you don’t have an obvious talent, it can always be developed. It comes by trial and error, and by regular practice. This is yet another reason why I am a strong advocate of having a side business. You can develop a talent through a side business, where the stakes will be much lower than they would be if you are trying to go at it full-time.
But whatever business you go into, make sure that you have the skills and talent necessary to make it work. It’s difficult enough to get a business up and running by itself, but infinitely more complicated if you’re trying to develop the necessary skills at the same time.
Skills and talents are soft capital, but capital nonetheless. They should be your primary investment in your business, rather than financial capital.
4. Flexibility vs. Rigid Business Plan
In our day and time, the world expects us to have plans. That includes daily to-do lists, weekly and monthly planners, bucket lists, five-year plans, ten-year plans, lifelong plans for our kids, and retirement plans. We’re led to believe that if we don’t have rigid plans that were dooming ourselves to failure. The common assumption is always that life will cooperate with our plans, implying a level of certainty that absolutely doesn’t exist.
But as John Lennon famously said, Life is what happens while you are busy making other plans.
In the business world, having a business plan is considered a requirement. It’s not a bad idea in and of itself. It can establish your overriding business goals, and lay out a plan as to how to achieve them.
That’s all good and necessary, but if life doesn’t cooperate with our plans, rest assured that business conditions will cooperate even less. There are simply too many variables. Globalization and the Internet have contributed to a Wild West business environment in which change is a given.
In today’s business environment – where both businesses and specific products and services have notoriously short shelf lives – plans of any type must include a generous allowance for flexibility in the face of changing circumstances.
Being rigid gives a better chance of a painful crash-and-burn than it does of creating business success. You can start out with a specific plan, but be prepared to adjust it as circumstances require. You may find that although you plan to go in Direction A, you end up in Direction E. Be prepared to roll with that potential, and make your business model flexible.
5. Cash Driven Business vs. Debt Driven Business
One of the big picture deceptions we have in recent years is low interest rates. They convinced many of us that borrowing money makes abundant sense since interest rates are so low. This might tempt you to borrow money to invest in a business. But despite historically low interest rates, borrowing money to invest in a business dramatically increases the risk of business failure.
No matter how low interest rates are, that produces both a legal liability and a monthly debt obligation. The very fact that you are making monthly payments is a drain on your cash flow, that compromises your business.
If you come to a time when you can’t make your monthly payments, your business could fail completely. Not because the business itself is unworkable, but because you couldn’t continue servicing a large liability.
I learned during my accounting days that business people who avoid debt have the greatest chance of surviving and succeeding over the long haul. They grow their businesses using cash generated from the business, and avoid debt. Those are the businesses that survive booms and busts in the economy and in their industries. They can do this because they’re not paying old liabilities.
We read much about large corporations borrowing money to grow their businesses. It works for many of them, because publicly traded companies can almost always raise more capital, either through additional debt or selling more stock. As a small businessperson, you don’t have those options.
Cash-and-carry is old school, but it’s the ideal way to run a business. You should keep your business model as close to this principle as possible. The last thing you need to be doing is paying today’s debts in tomorrow’s recession.
Do you have any other advice to increase small business success?