Eight Mistakes That Devastate Business Owners
"I wish I had known better." This is what disheartened business owners say to me when they face a problem that caught them completely off guard. Their regrets are big. Had they just "known better" and fully understood the hidden dangers of their actions, they wouldn't have spent the money, took the office space, cashed the check or signed on the dotted line. Their business lives would have been different.
So, what are some of the most costly oversights that can devastate unsuspecting business owners? What information might help save business owners from personal financial ruin?
Here's my list of eight nasty--but mostly avoidable--gotchas. Now you know better.
- Keep your retirement savings intact. I don't have many absolutes, but I do strongly discourage business owners from investing their retirement savings in a startup or a business that has not already developed a multiyear record of positive cash flow. If, for any reason, you file for personal bankruptcy, retirement savings are generally excluded from the reach of cash-hungry creditors. By keeping retirement savings intact, business owners never have to say they lost "everything" in a bankruptcy. Something rather than nothing is a lot easier to build on when all else is lost.
- Avoid the lure of sole proprietorship. Sure, it's fast, easy and inexpensive to set up a new business as a sole proprietorship. But sole proprietorship business organizations leave open the potential for business creditors to turn to the business owner's personal assets (home, bank accounts, valued possessions) to pay off debts from business obligations, freak-of-nature product liability claims, employee trips and falls, etc. To keep business liabilities within your business, consider organizing your business as a limited liability company or a corporation.
- Read the fine print. Even if you set your company up as a corporation or limited liability company, you may still become personally liable for your company's unpaid business debts. It happens when business owners sign documents that include "personal guarantee" language that obligates the signer to repay unpaid debts. You can find this language buried in business credit card, bank loan, equipment leasing and tenant agreements. To the extent possible, favor vendors that don't require personal guarantees, or try to negotiate limited guarantees with the ability to determine the specific order of personal assets that can be used to satisfy business claims.
- Get insured. Today there are about 8 million business owners operating out of their homes in the United States. A standard homeowner's insurance policy does not offer the same level of insurance coverage needed by most small businesses, especially if the business owns expensive computer gear. General liability insurance policies can cost as little as $500 for a broad range of business-related coverages, including business interruption insurance.
- Get an employment contract. How can a business founder get fired from the company he or she started and nurtured? It's easy: By losing voting control of the company's shares and the loyalty of the company's board of directors. One way to minimize the risk of getting fired from your own company without reasonable cause is to negotiate an employment contract with your company's current board of directors before raising money from large investors. New investors typically receive one or more board of director seats as part of their funding agreements, and this often changes the voting dynamic of a board. If a company's sales and profits don't meet projections, impatient board members can push for management changes.
- Protect your innovations. Startup entrepreneurs and well-established businesses frequently work with independent contractors while developing new products or technologies. To clarify the ownership of intellectual property rights, insist on vendor contract agreements that include provisions to "assign" all intellectual property rights to your company as a non-negotiable condition of the work relationship. The last thing any business owner needs is an unexpected dispute over the ownership of successful innovations and patents. Unclear intellectual property ownership documentation is also a common reason why entrepreneurs get turndowns from risk-averse investors. Extra tip: Moonlighters should not use employer property to work on business plans, CAD drawings, correspondence, patent applications, marketing materials, etc. for their sideline business. It doesn't matter if you use your employer's resources after work hours. Moonlighters risk not only claims of technology ownership by their employers, but also their good reputation. Being fired "for cause" can damage an entrepreneur's credibility for a long time to come.
- Don't promise what you can't promise. Can you ever "guarantee" that your company's product will be a big hit or that your company will become a multimillion-dollar enterprise? In their enthusiasm to impress potential investors, business owners often oversell a company's prospects in ways that can violate state and federal securities laws. No investment in an entrepreneurial company is ever "risk-free." Business owners can reduce the chance of disputes with disgruntled shareholders by disclosing investment risks in a candid and honest way.
- Check the books. Employee theft within small businesses is common. I hear the devious tales from fellow business owners and can report that one of my company's bookkeepers forged my signature to a few company checks. (She was caught because I look at the details.) Sure, most businesses can spare a few office supplies, but what can be devastating to a business owner's annual take-home pay is the cumulative impact of well-disguised changes to reported work hours to payroll companies, payments to nonexistent vendors, padding of office supply and computer vendor bills, and more.
No business owner wants to add more administrative duties to an already overcommitted work week, but consider random system reviews of any staff member who has access to bank accounts, automated billing functions or revenue collection systems. Are you sure your company is really collecting all of its internet-search-related revenues, or is your web developer rerouting your internet earnings for some extra beer money each week? If your employees and independent contractors don't think you look for fraud, then you make it easy for them to steal from your company.
Most business owners I know are forward-thinking, innovative and optimistic--they naturally look for the upside in their relationships with employees, customers and vendors. But what about the downsides? There is tremendous value to business owners when they give disciplined attention to minimizing the downside risks of business operations. In entrepreneurial business management, fewer gotchas equals fewer headaches, heartaches and money losses. And that represents a lot of upside in itself.
Susan Schreter is a 20-year veteran of the venture finance community and a university educator in entrepreneurship and social enterprise development. She is the founder of TakeCommand, a community service organization that offers the largest centralized database of venture capital funds, angel investment clubs, incubators and microfinance lenders in the U.S. Ask her your questions at firstname.lastname@example.org.