Entrepreneurial Failure:

How I Started a Business

and Lost My Shirt?

by Bill Corbin

Corbin Group Publishing

http://www.CorbinGroup.com
 ©2000 by Bill Corbin

All rights reserved. Except for brief review excerpts or quotations, no

part of this book may be reproduced in any form without written
consent from the author or an authorized representative of
CorbinGroup.com

Printed and bound in USA

by UN Printing, Division of UN Communications, Inc.
Cover Design: Tim Tobias

ISBN #: 189345603-X

First Printing: March 2000

For Information:
Bill Corbin – CorbinGroup.com.
1429 Chase Court – Carmel, IN 46032 – 317 800 222 0590 x330
http://www.CorbinGroup.com
email: BCorbin@UNCommunications.com

LEGAL DISCLAIMER
An entrepreneur is a risk taker. The purpose of this book is to help the reader
toward a positive outcome. However, there are no words or ideas in this book
powerful enough to guarantee success. Therefore, Bill Corbin accepts no
personal liability should your business results be unsatisfactory (nor will he
claim any credit for your success).
 Table of Contents

Introduction................................................................................... 1
A book presented by a reluctant veteran of business failure who
later achieved significant success. The goal is helping you learn
the issues that can sink an entrepreneurial enterprise without
going through the agony of defeat.

1. A Bad Idea in the First Place.............................................5

Some businesses have no realistic chance of success because the
basic concept is flawed. Bad ideas can result from errors in
understanding the marketplace, entrepreneurial “over-reach” or
both. The key is tough, objective analysis to identify flaws in
advance.

2. Flawed Market Research .................................................32

Good ideas can fail to poor market research. Is there enough
market acceptance? Market size? What are the key trends? What
is the competitive situation? Does the idea fit with the
entrepreneur’s skills and available resources?

3. Ineffective Marketing & Promotion .............................45

A recurring tragedy is the failure to educate the marketplace
about a potentially strong product or service. The problem can
be poor definition of business-purpose, poor decision making,
stop-go effort, inadequate resources, or inadequate skill vs.
competitors.

4. Excessive Ego .........................................................................54

A solid ego is important in launching and surviving the
entrepreneurial experience. But excessive ego can cloud
judgment, poison relationships, and lead directly to failure.

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Turnaround!

5. Too Little Time to Learn...................................................61

Business start-ups usually take longer and cost more than
expected. Cash cushion is critical. Entrepreneurs have varying
learning curves. If the learning curve is slow, there must be cash
to cover more time. Worst of all, some Es waste precious time.
Entrepreneurial “savvy” is a key learning goal.

6. Poor Customer Relations/Customer Policies............72

Positive customer relations can be a key competitive tool for
small business, but many entrepreneurs adopt customer
philosophies and policies that lead to problems. Businesses
serving a few “giant” accounts risk over-dependence and must
plan accordingly.

7. Partnership Problems.........................................................80
Partnerships can result in advantages or tremendous pressure
and conflict. The entrepreneurial life adds pressure to personal
relationships, especially if husbands, wives, children, or
significant others work together in the business.

8. Dishonesty, Greed, Sloth ...................................................95

A business can be killed by out-and-out dishonesty or by cultural
dishonesty instilled by the entrepreneur. Excessive milking of
company resources can create vulnerability to downturn. Sloppy
practices and poor quality control can sink a good business idea.

9. Lack of Toughness: Physical & Mental ................... 105

The entrepreneurial life can be demanding physically and
mentally. Lack of toughness can lead to poor leadership
performance, including shaky decision making. It is vital to be
tough enough to make and implement difficult decisions.

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 Table of Contents

10. Inadequate Information/Financial Control ......... 117

A company must monitor key trends both outside and inside the
company walls. Sound administrative systems will uncover
problems, protect against dishonesty and support company
growth. Either inadequate information or inadequate control can
sink the ship.

11. Inadequate Platform for Growth ............................. 125

Success in the form of rapid growth can be the seed of disaster if
planning is inadequate. Poor financial planning can lead to cash
crunch. Poor employee team building or poor infrastructure
development can create a company unable to handle market
success. Ill-advised diversification as well as failure to plan for
potential economic downturn can also lead to collapse.

12. Forces Out of Our Control.......................................... 133

A company can be brought down by acts of God or acts of
Congress. Demographic and fashion shifts can alter the entire
marketplace. The national or local economy can devastate a
business plan. The answers are awareness, flexibility and
contingency planning.

v
 Introduction

Your initial reaction to this book’s title was

probably something like that of one of my close friends.
“Bill,” he said earnestly, “it stinks out loud. People
buy positive books. Do you think Shipbuilding University
uses a textbook called How I Built the Titanic?”
Well, I didn’t attend Shipbuilding University, but
I’ll bet they do study notable shipwrecks. I’m also
confident that military schools spend some time reviewing
what went wrong for Custer at Little Big Horn and for
Napoleon at Waterloo.
Early in my entrepreneurial experience I received
some wonderful counsel. I had asked a very successful
business owner for his secrets of success. The answer
surprised me.
“Bill, most people never own a successful business
for one of two simple reasons.
“The majority never start. I believe almost everyone
has had an idea good enough to support a successful
business. But they just dream about it. They sit in pubs
talking with their friends about it. But they never start it.
The first key is simply to start, to get in the game.
“The second key is to avoid failing. Once you start,
you need time to learn the ropes, to understand your
product, your market, yourself. Then you are ready for
success. Too often, the new business has failed before its
owner reaches that point.”
In my case, I listened well to point one. In 1972, I
left my job with RCA to become a full-time entrepreneur.

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Torpedo Avoidance!

Unfortunately, I didn’t listen as well to point two. By late

1973, Corbin’s first ship had sunk. We sold our home to
pay business debts. My beautiful new Lincoln turned into
an 8-year-old Buick.
We did hang onto the entrepreneurial dream, and
25+ years later have built a multi-divisional enterprise that
is doing quite nicely. Without doubt, our current success
has a great deal to do with our earlier failure. It was a
miserable experience, but highly educational. I analyzed
what went wrong, vowed to never repeat the errors, and
eventually learned to be successful.
The Corbin experience since 1972 includes
something like 20 start-ups, three of which have been sold,
seven of which continue to operate, and ten of which help
me claim expertise in understanding how business ideas
fail. It has been quite an entrepreneurial adventure. (More
resume details are available on the inside back cover of this
book or at the website CorbinGroup.com.)
The goal of this book is very simple: to help you
learn what I learned without experiencing what I
experienced. A business failure is truly a gut-wrenching
experience. It is a direct attack on your dreams and self-
concept, a strain on your personal relationships, and a
devastation to your pocketbook…not to mention an
embarrassment at high school reunions. I really don’t
recommend it.
For this book, I studied a multitude of business
collapses in addition to my own. Many are presented as
case studies—real or highly realistic examples of
entrepreneurial ships being struck by torpedoes. Most of

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 Intro…

the case studies have been fictionalized a bit to avoid

embarrassment to those involved.
Let me mention a couple important pieces of good
news about this book. You are not facing twelve chapters
of nonstop entrepreneurial grief and carnage. Many of our
case studies involve “near misses,” problems that could
have been fatal but were addressed effectively so the ship
sailed on. The book also includes a great deal of to do as
well as what not to do.
This book coordinates closely with book 3 of the
Entrepreneurial Five Set—Entrepreneurial Leadership:
Fundamentals—a book that delves more deeply into the
steps necessary to build a sound entrepreneurial business.
As you’ll note in the Table of Contents, we have
divided the book into twelve chapters with multiple
subtopics. We could have had fewer. We probably could
have generated a hundred more. But in my experience, this
category set is a useful way to divide the issues. The
chapter order was not selected as an attempt to prioritize
torpedoes. If one of them kills your business, kaput is
kaput. In all likelihood, a failure results from a combination
of factors. There is also significant overlap between
categories. For example, the owner’s excessive ego can
cause him/her to pursue a bad idea or to ignore the need for
market research.
It is probably best to read the entire book for
content, then to zero in on the categories that seem most
relevant to you. Then read, reread, make notes, make
spreadsheets, read other books...do whatever it takes to
assure that you thoroughly understand and are prepared to
deal with the risks most likely to affect your business.

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Torpedo Avoidance!

A few quick style points: A couple paragraphs ago,

we used the politically correct him/her. Even if PC, this
seems unduly cumbersome, so from this point, we’ll
randomly intersperse hers and hims. As another load
lightener, we will often use the single letter E to indicate
E(ntrepreneur) or E(ntrepreneurial).
You’ll find the style of the book to be
straightforward, sometimes blunt. Obviously I mean no
offense. Our topic is serious; we are here to help you dodge
the torpedoes while sailing toward entrepreneurial success.
In my experience, successful Es are no-nonsense about
important subjects.

So, let’s go to work.

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 Chapter 1

It Was a Bad Idea from the Start!

When I’m attempting to explain my personal

business failure in 25 words or less, my summary is this: “It
was a bad idea...badly executed...in a bad economy.
Outside of that, I was fine.” My experience illustrates that
business failures result from a combination of factors. Most
of all, though, it was a bad idea. So, we will prominently
feature the Corbin disaster in this chapter.
Simply defined, a bad idea is a flawed business
concept. It overlooks, from the start, realities of the
marketplace or realities of the entrepreneur’s skills or
resources. Ironically, hindsight is usually 20-20 in spotting
bad ideas. The flaw is easy to identify, and the newly
impoverished entrepreneur can’t quite believe he missed it.
Before looking at some actual cases, let’s illustrate bad
business thinking by exaggeration:
It’s 1906. We are thinking about launching a new
buggy whip company. Sure, a few people are driving these
new-fangled automobiles, but they bang, clang and break
down every time they hit a bump. This auto fad will never
last! Several established competitors have panicked and
actually left the horse & buggy accessory business.
(They’re trying to make silly things like spark plugs or
shock absorbers!) The era of the horse will return—and
there’s a wonderful opportunity to capitalize now that our
competitors are bailing out! In fact, we can probably

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Torpedo Avoidance!

expand our idea to include saddles, bridles and horse

grooming products. (The fuzzy crystal ball syndrome.)
It’s 1963. I think I’ll open a barbershop. What a
great business. Everyone in the world gets a haircut every
two weeks! No long-hair like Elvis Presley or the Beatles
will ever change that! (Another crystal ball problem similar
to opening a western-wear shop late in the line-dancing
craze.)
It's 1967. This discount store boom is the wave of
the retail future! We'll borrow $25,000 and open our own
discount store to compete with the new Kmart down the
street. (Serious underestimation of the importance of
competitive resources in executing a start-up, an error now
being played out in cyberspace as a host of dot com
companies directly challenge Amazon and other
entrenched, deep-pocketed players.)
I absolutely love to play golf and I’m tired of
farming. Several of my friends love golf, too. I’ll turn my
farm into a golf course! “But, John, your farm is flat, has
poor grass, no trees, and no creeks. You have a total of 9
golf-playing buddies. You are 47 miles from the nearest
major population center where there are 17 established
country clubs.” (A questionable idea coupled with very
poor market research.)
These examples reflect truly bad ideas and/or badly
flawed thinking. Even a fool should see the defects, right?
Remarkably, though, zealous Es (entrepreneurs) continue to
pour their resources into ideas this bad or worse.
Sometimes the culprit is arrogance or stupidity. More often
it is a very tender trap: “I really want to own a business.
I’ve dreamed about it for years and I finally have an idea

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 Bad Idea

that looks great. Don’t discourage me with any negative

facts or analysis.” As we’ll see, it is crucial to deeply
analyze your idea before grim reality analyzes it for you!

The Role of Your Idea in Business Start-Up

Before diving into various kinds of start-up
categories, let’s carefully position the role of your idea as a
success factor. It is highly over-rated in most cases. Here’s
a typical scenario. The gang is at Barney’s Pub moaning
about Pet Rocks. “Why does someone else always come up
with the fabulous ideas?” “Yeah, if I ever hit on anything
that great, I’ll be rich too.”
The gang is reflecting a common misunderstanding,
the notion that entrepreneurial wealth comes from a
blinding flash of inspiration—the light bulb that leads to
success and empire. It may happen now and then, but
rarely. The idea is just one leg of a four-legged table:

• Idea: the basic concept, purpose, product and

service of your business
• Market: a prospective set of buyers large enough
and accessible enough to provide necessary revenue
• Resources: the combination of start-up capital and
entrepreneurial skill necessary to establish the
concept in the marketplace
• Delivery System/Infrastructure: the business
functions required for marketing, production, and
financial control

A veteran entrepreneur listening to the moan-fest at

Barney’s might be tempted to say, “OK, here’s an idea just

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Torpedo Avoidance!

as good as Pet Rocks…try Pet Candles.” But her comment

would be a lesson, not a suggestion. Pet Rocks did not
create wealth because it was a fabulous idea. The wealth
came from fabulous creative marketing and effective
delivery of the product to market. The same business team,
had they been willing to deal with the psychological trauma
of customers’ pets melting during use, could have probably
succeeded about as well with Pet Candles or Pet
Whatevers.
An idea, especially a highly creative idea, is usually
not the key to entrepreneurial success. I would respectfully
submit that every one of the whiners at Barney’s has had an
idea at least as good as Pet Rocks. But the road to wealth
via product distribution is long and treacherous. Among
necessary elements: raising venture capital; finding
manufacturing sources; designing effective packaging and
point-of-purchase displays; developing brilliant marketing
and promotional plans; building a channel of distribution;
then establishing sound quality control systems, credit and
collection system, financial control systems, and a bunch of
other systems.
An acquaintance recently asked my opinion of his
plan to accumulate minor wealth by marketing his own
lines of custom Mattel Hot Wheels cars. He was seriously
excited about entering the business based on this analysis:
1. Hot Wheels are still hot.
2. People pay $15 each on Internet auctions.
3. He can produce cars for $5 or less.
4. Therefore “selling a thousand cars would let me
make $10,000.”

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 Bad Idea

It is never my goal to unduly discourage a potential

entrepreneur, but in this case it took less than five minutes
of “Have you thought about how you would…?” questions
to cool the Hot Wheel fervor. Note this very important
distinction. The Hot Wheels idea may have been fine. But it
wasn’t fine just because Hot Wheels are hot and there’s a
$10 difference between cost and hoped-for sell price. The E
must understand the rest of the process and be willing to
make the serious commitment necessary to make that
process come to life.
The over-stated role of “the idea” is widely
exploited by get-rich-quick schemes presented in books,
infomercials or on the web. The ideas sound great: “Buy
property cheap using someone else’s money, then sell for a
huge profit”; “Import exotic products cheap and sell them
at huge profits.” Etc. Etc. Etc. Again, these may be fine
basic ideas. I don’t doubt that people have used them to
build successful businesses. But the notion that the idea is
the primary key to easy wealth is just plain wrong.
The good news is this: Solid ideas are readily
available. They may not be highly creative. They may not
lead directly to national or international distribution. But
careful market observation coupled with realistic
assessment of your resources and skill-base can lead to a
broad variety of good-enough business ideas.

Five Kinds of Business Start-Ups

Most entrepreneurs begin via one of these avenues:
• Creative Concept: a new idea, never before tried
• Competitive Start-Up: entering an established
field (e.g., food service, retail clothing)

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Torpedo Avoidance!

• Franchise: purchasing the rights to a proven

concept, name, and business system
• Distributorship: securing rights to sell a product or
service within a given geographic area
• Business Purchase: purchasing an established
business from its previous owner
Each of these avenues includes pros, cons, and
opportunities to fall into the bad idea trap.

Creative Concept
Creative concepts are brand new. They may be
product innovations or exciting new services. Product ideas
may range from socially significant medical technology to
our already-discussed friend the Pet Rock. Services can
range from important financial planning programs to
1-900-YO-SHRINK. Emerging technology can create
whole new possibilities as powerfully demonstrated by the
thousands of new.com concepts that crowd the Internet.
Creative start-ups are certainly the most exciting. It
is bold to enter where no person has dared enter before. For
the founders of companies like Polaroid, Xerox, Microsoft
and others, creative thinking led to astronomical success.
And “fortunes by fad” continue to be made on products like
hula-hoops and beanie babies. But creative start-ups are
extremely perilous. Optimistic entrepreneurs tend to
exclaim, “Hey, I just had a great idea for a new [fill in
blank] and nobody is doing it!” Of course, it’s possible the
new idea is a real barnburner that will lead to fortune, but
there are two darker possibilities:

10
 Bad Idea

• Nobody is doing it because the people who have

thought of it previously had the good sense to order
another beer and forget it.
• Nobody is doing it because the people who have
tried it failed miserably and have disappeared
without a trace.

At best, a creative start-up is tough. You must

convince people they need something they don’t know they
need. By contrast, competitive concepts involve businesses
in which need is already established and dollars are already
flowing (restaurants or print shops are excellent examples).
It is almost always expensive and time-consuming to
convince the marketplace to accept a new idea, even a good
new idea. Many failed creative start-ups might have
eventually succeeded if the entrepreneur had not run out of
time and money before market acceptance was achieved
(Chapter Five).
At worst, creative start-ups are impossible. The idea
is simply a clinker. All of us know at least one hopeful
inventor who has come up with “the best thing since sliced
bread,” but behind his back friends are snickering, “Fred’s
at it again, and this idea is just as loony as his last three.”
The fictional (I assume) “face bra” invented by Ali
McBeal’s irrepressible Elaine comes to mind. In real life,
two fairly recent examples show the perils of high
creativity. Our first E apparently did market research by
listening to complaints from female members of his
household. He invented a toilet seat accessory that, after a
predetermined time interval, automatically lowers the seat
to horizontal from the vertical position in which thoughtless

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Torpedo Avoidance!

males have left it. This invention has earned considerable

free publicity via stand-up comics and CNN on slow news
days. But the jury is still out regarding the number of
customers interested in paying for, not to mention
installing, a relatively complex device on each of the
household toilets potentially used by aggrieved females. As
a tiny example of the marketing challenge, consider trying
to decide the Yellow Pages category to list under. The
second guy, probably a golfer with a bad slice, has invented
a golf ball with a built-in siren. The intent, of course, is to
allow the ball to be easily found, even if you’ve knocked it
into the deepest rough. The inventor faces the daunting task
of finding a siren loud enough to be heard, light enough to
be in-boarded in a golf ball, cheap enough to be affordable
and tough enough to survive being whacked repeatedly. I
wonder whether he has considered the problems of
substantial success—the solitude of the links being marred
by hundreds of screaming golf balls, not to mention the
challenge of telling which screaming ball is yours. We wish
both these entrepreneurs well, but they certainly illustrate
the challenges of creative start-up via invention.
We will now observe a moment of silence, then
dive into Case #1, the author's own "creative" business
disaster

CASE #1: Mr. C had been an employee in the marketing

department of RCA Consumer Electronics. He became
increasingly aware that RCA’s research and development
function was turning out product ideas that would never be
marketed. For example, RCA had developed a calculator-
in-a-watch years before it was finally introduced

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 Bad Idea

commercially. However, RCA had concluded, “We don’t

know anything about distributing watches, so we had better
stick with TVs and stereos.”
Mr. C talked to friends in other large companies
and learned this is a common situation—unexploited new
product ideas that do not fit with the established channel of
distribution. He also learned that many inventors come up
with good ideas but have no idea how to get them sold
around the country.
Mr. C was also dreaming of becoming self-
employed. He said to himself, “Man, if I had access to new
inventions or to exciting products like calculator watches, I
could find ways to sell them and could build a successful
marketing business.” He further reasoned, “I’ll bet there
are people like me in cities all across the country. They
want to own a business and would love to market new
products.”
And so, Concepts 4, Inc. was born. It’s purpose: to
create a nationwide network of marketing-oriented
entrepreneurs, then to offer that network to companies or
inventors wishing to secure national distribution for their
product ideas.

The idea sounds pretty decent doesn't it? In fact, it

sounded decent enough that Mr. C took out a second
mortgage to launch it and a couple pretty intelligent
businessmen invested $25,000 in its start-up. But 15
months later, Concepts 4, Inc. was in the trash heap.
This failure will deservedly raise its ugly head in
later chapters of this book. It illustrated perhaps eight of
our dirty dozen. Most of all, though, it was simply a bad

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Torpedo Avoidance!

idea. Hindsight's clarity reveals that Concepts 4, Inc. had

virtually no chance to survive its own chicken-egg
dilemma.
Mr. C’s dialog with companies or inventors went
something like this:
“I have a great deal for you. Give me rights to your
product, and my national distribution team will market for
you.”
The company/inventor rightly asked, “Great, how
many members does your distribution team have?”
“Uh, well, so far it has my brother-in-law in Fort
Wayne, a good friend in Philadelphia, and maybe ten
others, but we have high hopes for national expansion.”
“Great, come back when you have that team put
together, maybe four or five hundred.”

As you've undoubtedly guessed, the discussion

with the network prospect in Atlanta went something like
this:
“Mary, hey, we’ve got an incredible concept. You
join our network as an entrepreneur-marketer and we’ll
feed you a stream of new product concepts.”
“Sounds interesting. What products do you have for
me?”
“Well, uh, so far we have a line of low cost greeting
cards and a do-it-yourself kit for a cardboard grandfather
clock; but we’re working on some really exciting stuff.”
“Great, come back when you’ve got that product
line filled in a little.”
Mr. C never got over the chicken-egg hurdle; and
after 15 months of grueling effort, Concepts 4 died a

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 Bad Idea

lingering death. Our grandfather clock became a classic

symbol of the effort. It cost $49.95 retail. It looked pretty
darn good from a distance of maybe 10 feet. But any
passing three-year old on a Big Wheel could bring it
crashing to the ground. Somewhere around the time we
were considering shipping a concrete block with each unit,
we realized that failure was at hand.

There are numerous lessons in this failure, but two

pertain to the possibility that your business idea is simply
unsound:
• Mr. C talked to his family and friends about his
idea. They were supportive! They figured he was a
pretty bright guy who did well in whatever he tried,
so this idea would probably work well.
• Mr. C did not talk to some truly tough business
analysts who would try their best to shoot holes in
the concept. Similarly, Mr. C did not practice an
excellent management planning technique called
brainstorming every possible flaw and problem in
the business concept.

New entrepreneurs with creative ideas have a strong

human tendency to seek affirmation of their business idea
and to avoid negative analysis. It is far better to spend
several days or weeks in hard analysis, even if your idea
gets beat up, than to spend several months and your life
savings getting beat up by the marketplace.
The Concepts 4 story also shows the interaction
between idea and the E’s skill-base. At a concept level, I
occasionally point out that Amway is very successful and

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Torpedo Avoidance!

utilizes a strategy close to my Concepts 4 idea—a broad-

based group of independent distributors now selling
everything from detergent to electronic products to long-
distance service. So maybe the idea was OK after all; but
Bill Corbin did not have anything close to the financial and
personal resources necessary to make it happen. Therefore,
as a practical matter, it was a lousy idea.

Competitive Start-Up
After Concepts 4, Inc., I tried a second creative
concept called Unified Neighbors, a cross between a
consumer organization and a local consumer magazine.
After two years of uphill struggle, Unified Neighbors was
well established and continues to operate today. To offset
the cost of printing the magazine, we bought our own
printing equipment. Soon we had branched into retail
printing, a classic example of a competitive start-up.
Having experienced both creative and competitive
business start-ups, I am convinced that competitive
marketing offers the higher likelihood of success. However,
case studies #2 and #3 show that it can go very wrong.

CASE #2: Fred is an avid do-it-yourselfer. He

absolutely loves visiting hardware stores, sometimes just to
browse, sometimes to locate the perfect tool for his next
project. Fred had noted that old-fashioned service had
disappeared from the hardware stores in his town. The
stores were now megastores, badly understaffed or staffed
by employees who didn’t know a bandsaw from their elbow.
So Fred decided to fulfill his lifelong dream and open his
own hardware store.

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 Bad Idea

Fred did some sketchy research and determined

that people he knew were also frustrated when they
couldn’t get help. He interpreted this input as affirmation
of his business plan. He checked wholesale sources and
learned, not surprisingly, that he could not buy as well as
the megastores buy. He worked with an accountant to
determine that he would need to charge about 12% more,
on average, than his larger competitors. Fred was not
discouraged, feeling his better service would easily justify a
price differential.
Fred launched his new business with his personal
savings and an SBA loan. He personally hired his service
team and carefully trained them. His store was located
reasonably well, was stocked well, and on opening day
fulfilled his every expectation. Six months later it was
closed.

Fred’s failure resulted from two truths of

competitive marketing:
1. Customers will buy only if you provide them
overall value greater than that of your competitors. The
value customers perceive will be made up of a combination
of selection, quality, location, customer service and price.
You must fully understand your customers and the way
they will determine value.
On this score, Fred missed badly. He was correct
that customers wanted help…in some cases. So they came
to him when they were looking for obscure tools or screws
and nails in unique configurations. His 12% surcharge was
fine on these small purchases. When they wanted a product
they fully understood or a high-ticket item such as brand-

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Torpedo Avoidance!

name power equipment, price became a much more

important criterion. Fred’s 12% surcharge put him $24 high
on a $200 item, so many customers bought elsewhere. Fred
quickly learned that success required large-item sales and
could not be built on obscure bolts and washers.
In a desperate step, Fred tried price reductions, but
his cost structure couldn’t be supported at lower pricing.
Finally he was forced to lay off personnel, killing his entire
concept of superior service.
Fred might well have failed simply because he
misread customer need. He was also hurt by a second truth
of competitive marketing:
2. You cannot assume the competition will stand
still, either after you launch or as you build.
Fred’s larger competitors decided not to sit still
after Fred opened. They hired enough additional personnel
to advertise, “Greatly increased staff ready to serve you!”
This move countered much of Fred’s strategy and left him
with little competitive maneuvering room.

CASE #3: Jennifer S had dreamed of owning a

fashion-clothing store. Using her limited financial
resources, she opened a small shop in a strip-shopping
center. She was out of business in less than a year.

Jennifer had multiple problems, but her idea was

bad from the start. In effect, her business was like a
basketball team made up of five short players who are poor
shooters and can’t jump very high. In her market she was
playing against the pros, and she simply had no chance. Her
buying skill, therefore her inventory, was less impressive

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 Bad Idea

than theirs; her location was worse than theirs; her

marketing skill/clout was less than theirs; her service help
was less experienced than theirs; her prices were no better
than theirs. Jennifer’s concept totally ignored the
competitive reality that we must give customers a good
reason to select us and to keep coming back to us. She
realized this truth within two weeks of opening her shop
and was genuinely surprised she hadn’t seen it ahead of
time. Her limited resources precluded the kind of
aggressive action that might have shored up her position.

Franchise
Theoretically, the purchase of a franchise is your
best guarantee of avoiding the possibility of a “just plain
bad” business idea. The franchise concept allows you to
pay for an already proven business plan.
Statistically, the odds of success via franchising are,
indeed, much higher than those for independent start-ups.
Depending on which liar is doing the figuring, 5-year
survival rates for franchisees are over 80% vs. perhaps 40%
for independent start-ups.
While “liar doing the figuring” is an overly harsh
assessment of many pillars of the franchising industry, it
does reflect a new truth. The popularity of franchising is
attracting hordes of new franchisors. Some of these new
players have wonderful ideas and programs. Some are
simply cashing in on the surge in franchising. An 80%ish
success number reflects the dramatic long-term success of
franchisors such as McDonalds, KFC, AAMCO and their
ilk. It assuredly does not reflect the survival odds of those

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Torpedo Avoidance!

purchasing a brand-new “Uncle Bernie’s Cigar

Emporium.”
The entrepreneur considering a franchise faces a
tough trade-off. Investment requirements for top-name
franchises are typically well into six figures, maybe seven.
If resources are limited, it is necessary to consider lower-
cost start-ups, and these tend to be younger, less-proven
players.

CASE #4: Judy had been restructured out of her

office manager position, so she decided to try her own
business. She read an ad for a “hot new franchise” in the
field of desktop publishing linked to the worldwide web.
The company’s promotional material was powerful and
made real sense—obviously these were hot fields built on
utilization of computer technology. Her background
seemed to fit perfectly.
Judy invested $35,000 for her franchise fee, initial
training and some equipment. She spent an additional
$7,500 to equip a small office.
The company did a good job of training Judy on
operation of her hardware and software, but was a little
vague about exactly where her clients would come from.
They offered no national advertising and only a couple
mock-ups for direct-mail pieces. Judy tried the direct mail
marketing ideas and worked hard to network with
acquaintances to build a customer base. She found
competition to be much stiffer than she would have
dreamed, and sales growth was painfully slow.
Judy’s franchise agreement called for an 8%
royalty, a payment that griped her increasingly as she

20
 Bad Idea

realized the franchisor’s ongoing help was virtually nil.

Soon she learned that the franchisor’s hardware/software
package was obsolete vs. newer products she could have
bought for less money. She soon realized the franchise
package was overpriced and oversold.
Finally word filtered to Judy that fellow franchisees
across the country were having the same problems.
Unable to pay her overhead, royalties and loan
payments, Judy closed her business. Shortly thereafter, the
franchising company entered bankruptcy.

A sound franchise will offer these important

benefits:
• Proven market
• Proven products/services to reach that market
• Fully developed business system (infrastructure)
• Fully developed marketing plan
• Access to an ongoing stream of product and system
improvements

The costs of these benefits are

• Franchise fee
• Ongoing royalty payment
• Allegiance to the franchisor’s business system

FTC regulations require extensive disclosure by

franchisors. Careful study of these documents is vital, aided
by an expert if you tend to be overwhelmed by a 3-inch
stack of statistics and legalese. Among the vital data in
disclosure documents are franchisee turnover, franchisor
financial strength, and franchisor litigation experience.

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Torpedo Avoidance!

The franchisor’s sales people, aided by slick

promotional material, handle a large percentage of the
interaction between franchisors and prospective
franchisees. It is fair to say that these sales people and their
literature have varying truthfulness levels. Many of them
earn their living on straight commission. Some are outright
flimflammers. All are skilled at romancing positives and
explaining away negatives. It is advisable to base relatively
little of the decision process on the words spun by the
franchise sales person.
The best possible method to analyze a franchise is
to physically watch it working in a city and marketplace
similar to yours. (The franchisor will often suggest model
franchises for you to visit. It is far better to do your own
research and visit franchises that are not specifically
recommended by the franchisor.) You should first view the
business from the standpoint of a customer. You should
then attempt to directly discuss with the owner issues such
as:
• financial results
• franchisor relations
• operational problems
• continuing help
• overall satisfaction with the program.

Unless you are negotiating with a proven, high-

profile franchisor, it is crucial to invest whatever time and
travel money it takes to conduct thorough research.
If you are considering a relatively unproven
franchise, an important issue is your ability to survive if the
franchisor would fail. Many franchises can continue nicely

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 Bad Idea

as solo operations. Others involve purchase of products,

celebrity name, or technical support that would cause the
franchisee to fail immediately if the franchisor were to
collapse.
Franchising involves a relevant psychological issue
for the entrepreneur. Good franchises tend to be highly
structured in terms of products and systems. Franchisor
field personnel visit often to inspect and, as necessary,
mandate compliance with franchisor rules. It’s something
like having a boss. So, for entrepreneurs strongly oriented
to soaring freely with Jonathon Livingston Seagull, the
strictures of franchising may not be worth the benefits.

Distributorship/Dealership
A distributorship lies somewhere between a
franchise and a freestanding business start-up. Typically, if
your name is Jones and you are distributing Magnavox
products, your business will be called something like Jones
Marketing vs. Magnavox Marketing. Nonetheless, you will
be closely allied with the provider(s) of your goods or
services and will tend to rise or fall as their fortunes rise or
fall. A close cousin to the distributorship is the
“Manufacturers’ Representative” business that can be
established to “rep” (a.k.a. “peddle”) one or more
manufacturers’ goods into your marketplace.
Whether your business idea is good or bad often
depends on understanding the difference between push and
pull.
Pull Marketing: The manufacturer creates demand
for your product at the end-user level, typically by effective
advertising and retail presentation. L’eggs pantyhose or

23
Torpedo Avoidance!

high-profile soft drink brands would be good examples.

The distribution system then stocks and delivers product to
fulfill the demand that is being pulled through the channel
via customer demand.
Push Marketing: The manufacturer views his role
as simply producer of the product, pushing the product to
the distributors who are responsible for creating demand at
retail.
Either system can be profitable, but it is vital to
fully understand the difference.

CASE #5: John G. walked away from a vice-

presidency after a policy dispute. Seeking to avoid
corporate politics, he sought his own business and found a
Canadian firm that was seeking U.S. representation for a
unique line of candy. John invested a major chunk of his
savings in inventory and launched his new company.
The Canadian firm utilized a classic push strategy,
providing good mark-ups but no assistance in advertising
or marketing. John’s background had included some sales,
but he knew nothing about candy marketing or distribution.
He suffered early losses through errors as basic as
allowing inventory to be stored in hot warehouses where it
promptly turned to goop. John was successful in personally
contacting some retail accounts and securing shelf space,
but he had no plan or control system for distributing
products and collecting money through hired sales people.
He lost major money through pilferage of inventory and
theft of cash.
John attempted to develop some sophisticated sales
literature, but his lack of expertise and capital resulted in

24
 Bad Idea

wasted time, wasted money and ineffectual material. John

also lacked the resources to hire experienced managers
who might have helped him fill in his experience gaps.
Within six months it was clear that all systems were
collapsing. Three months later, John applied for work at a
local corporation.

As in previous cases, John had multiple problems,

but he was primarily victim of a business idea that was very
bad for him. His Canadian supplier looked at the U.S. as a
major place to dump a great deal of candy. At no point did
the manufacturer show concern about helping move that
candy through the distribution channel. (Some
manufacturers have done quite nicely by loading
distributors and dealers nationally with a product that never
sells well at retail.) John was involved in a classic push
marketing situation. This can be fine if you know how to
sell the product to your marketplace. John had no clue and
didn’t have the time or resources to get a clue.
Note that a pull strategy involves a much lower
burden of expertise. There is powerful marketing help and,
typically, there are well-established mechanisms for
product distribution and funds flow. Profit margins are
likely lower, and there may be less flexibility regarding
expanding market potential, but risks are much lower.

Multi-Level Marketing
Multi-level marketing is an interesting subcategory
of distributorships. Perhaps the best-known multi-level
system is AMWAY, which has (as mentioned in partial
defense of my Concepts 4 lunacy) evolved into a

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Torpedo Avoidance!

distribution powerhouse. Multi-level marketing relies

heavily on distributors recruiting sub distributors who
recruit their own sub distributors. Critics liken the system
to a chain letter and, indeed, there have been systems that
prospered for years by inspiring distributors to move
products from garage to garage, largely unconcerned
whether anyone actually bought the stuff at retail.
As the industry has matured, many of the shady
characters have been weeded out (although extreme caution
remains advisable as multi-level allows new generations of
hucksters to show big “easy money” numbers to the greedy
and the gullible). For many fledgling Es, multi-level
marketing provides an avenue for getting started in
business that can be a first step toward other business
activity. The percentage of players in multi-level who truly
“hit it big” is very low primarily because of burnout. The
constant need to “invite” (skeptics call it “lure”) potential
distributors to recruiting meetings, followed by the need to
“close” those prospects, followed by constant training and
motivation of the distributor group, is extremely grueling.
But, as a way for a brand-new E to get his name on the
letterhead for a relatively small investment, ML can be a
positive step.

Purchase of an Existing Business

Ideally, purchase of an existing business assures
that you will avoid the pitfall of a bad idea. The idea has
been planted and has grown in the marketplace. But far too
often we are purchasing someone else’s bad idea.

26
 Bad Idea

CASE #6: Jim and Sally had dreamed of owning a

restaurant. They learned through a business broker that a
seven-year-old business in the city was for sale. They
visited to have dinner and were reasonably impressed,
although they noted several lapses in service that they
would certainly correct.
They entered negotiation and learned that the
present owner desired to leave the business “to pursue
other interests.” They also learned that the business was
“losing a bit of money each year,” but the reasons sounded
reasonable. The owner assured them that “New blood with
new enthusiasm can easily turn the situation positive.”
Jim and Sally had their accountant study three
years of records. The accountant noted that sales were
definitely trending downward. He agreed, however, that the
business was close to break-even although clearly not
profitable.
Jim and Sally decided to dive in, confident they
could fix any problems and make the business work.
Despite their efforts, the business continued to
decline. Taking money out of the business was almost
impossible, causing Jim and Sally to struggle just to meet
living expenses. Finally, they admitted they were making no
progress and after two years closed the restaurant.

This case illustrates a powerful business axiom:

A downward trend, once in place, will continue
unless there is powerful countervailing strategy. As Jim
and Sally learned more about their predicament, they
discovered that the previous owner was, in fact, an
experienced, dedicated restaurant operator. The restaurant

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Torpedo Avoidance!

had enjoyed many good years, but a combination of

changing neighborhoods and changing competitive
pressures had impacted the business very negatively.
Because profits were down, the owner had skimped on
maintenance for several years. He had also operated
without adequate service staff. His P & L was “close to
break-even” only because vital expenditures were not being
made. Over the years, the loyal customer base had
dwindled—trying more glitzy competitors in the shopping
centers. Jim and Sally simply did not have the resources to
generate a “powerful countervailing strategy.” Therefore,
they were virtually doomed to ride the downward trend the
business was already on.
Certainly there can be successful small businesses
FOR SALE, and the purchase of that business can be
beneficial to both buyer and seller. Far too often, though,
small businesses are FOR SALE for frightening reasons.
It is absolutely vital to have a clear understanding of
the seller’s motivation and of the real situation the business
faces. Unless powerful, affordable strategic steps can
clearly address problems, it is best to steer clear.

The Brighter Side

Let’s close this chapter with a couple spectacularly
good ideas.
Baby Time-Capsule: A just-out-of-art-school
entrepreneur created the baby time-capsule in the early
‘90s. His idea blended interest in family history with a
parent’s desire to leave a legacy. It capitalizes on the gift
giving associated with the birth of a new child. The product
itself is a relatively simple canister made of time-worthy

28
 Bad Idea

material. But the publicity campaigns and marketing savvy

have been first-rate. The idea is a clear major-league
winner.
Wild Birds Unlimited: This retail concept provides
multiple products and information resources for wild-bird
lovers. The retail operations are carefully considered in
terms of size and overhead to be affordable within the
realistic revenue base of a “wild bird shop.” The idea is a
blend of creative and competitive. There are certainly
existing stores serving the needs of bird lovers. But the
name, marketing and product/service line-up is unique. The
concept has now moved from very successful retail
operation to national franchise.
Internet Applications: The Internet, at least as I
write these words, is much like the new frontier. There is
adventure, excitement and a pretty good chance of being
shot in the fanny with an arrow. But new business ideas are
everywhere on the Net, and some are working extremely
well. These ideas tend to be a blend of creative and
competitive—combining an existing need (travel, for
example) with a creative service delivery system. I will not
boldly name names here (despite my many years of risk
taking), but I’m confident you can make a list of real idea
winners in this new medium.
Many Big Companies: It is very educational to
read the history of large companies founded in, say, the last
50 years. There is almost always a “very good idea” at the
core of the success. McDonald’s visualized the working
family that would not sit down promptly at 6:00 to eat
mom’s cooking. Cisco visualized the highway for Internet
traffic. Microsoft foresaw a computer on every desktop.

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Torpedo Avoidance!

Dell saw the Internet as the way to market those computers.

Hewlett-Packard saw printers hanging on the computers.
The common theme for many good ideas is an
excellent crystal ball: the ability to project trends in tastes
and lifestyles then visualize the products and services that
will be integral to the new marketplace.

What about Company or Product Name Selection?

Let’s briefly touch on an issue related to the “idea.”
Some Es agonize over the importance of a clever or
strategically relevant name. I think the only safe counsel is
“don’t agonize too much.” Smuckers is doing fine. Orville
Reddenbacher is selling a lot of popcorn. A hardware
manufacturer in my city prospered nicely with the name
Carmel Screw (later changed to Carmel Locknut &
Lockwasher). Frigidaire was named for refrigeration but
successfully sold dishwashers, washers and dryers.
Names should carefully avoid trademark
infringement. To the extent possible they should be
descriptive without confining future growth. But it doesn’t
seem to be a critical component of success or failure.

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 Bad Idea

To Ponder and Discuss

1. Why is “good idea” only one of the four legs on the table of
entrepreneurial success?

2. Why is ego often the enemy of sound analysis of business

ideas?

3. Using our five categories: (1) creative startup, (2) competitive

startup, (3) franchise, (4) distributorship, (5) purchased
business; list business failures you have observed. Why was the
concept flawed: basic idea, entrepreneur skill/resources, both?

4. Why is a competitive start-up less risky than a creative one?

What are the pros and cons of competitive vs. creative?

5. Why is a franchise purchase less risky than a new start-up?

What are the negatives to franchising?

6. Reread each of the cases in this chapter. Consider why the

business idea was in trouble. What, if anything, could have made
the idea better?

7. Give examples of successful small businesses that used an

“excellent crystal ball” to come up with their ideas.

31
 Chapter 2

Flawed Market Research

This chapter uses the term market research in a

straightforward sense. We’re not talking about giant
corporate programs conducted by MBAs in carefully
defined test cities using sophisticated sampling techniques.
For our purpose, market research asks these basic
questions:
• Do the dogs like the taste of our dog food?
• Do they (at least some of them) like our food better
than our competitors’ food?
• Do they keep liking it after they’ve used it for
awhile?
• Are there enough “us-favorable” dogs in our
marketplace to support our business financially?
(The next chapter asks a closely related question. Do we
have the skill and resources necessary to market our
product to the dogs or their purchasing agents?)

Of course, there is a close correlation between Bad

Business Ideas and Flawed Market Research. Every one of
our disasters in Chapter One (including my own) might
have been avoided if market research had been better. Let’s
illustrate the difference between “idea” and “market
research” with a common example. Like most major cities,
Indianapolis’ has an area that is now wall-to-wall
restaurants: new concepts, old concepts, wild concepts,
tame concepts, all kinds of concepts. The failure rate in this

32
 Market Research

area is now increasing. The reason, in my opinion, now has

more to do with research than with idea. The fundamental
questions have become, “Can this market area possibly
support another restaurant?” and “Does my concept offer
enough competitive benefit to grab a reasonable share of
market?” Ideas good enough to survive and thrive in less
saturated markets might very well fail in Keystone at the
Crossing.

For this book, we will define market research as

including these five elements:
1. The process of understanding the needs/desires of
potential customers
2. The accurate projection of trends in the
needs/desires of potential customers
3. The measurement of potential market size
including trends in potential market size
4. The study of outside forces, including
competitive forces, that might affect our
business
5. The fit of our concept, skill and resources with
the marketplace we have defined

There is some tendency among Es to scoff at

detailed market research. “It’s a luxury that great big
companies enjoy.” “It’s a place for them to stick their new
MBAs so they don’t bother anyone.” “Didn’t Ford do all
kinds of market research before the Edsel debacle?” It is
true that small business start-ups rarely have the time or
money to mount detailed market research studies. It is also
true that expensive market research can lead to pitiful

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Torpedo Avoidance!

strategic decisions. But failing to analyze any or all of our

five elements of market research can be disastrous. Let’s
again simplify to these basic questions:

1. Will anyone want this product at the price I need

to charge?
2. Since I’d like my business to last a long time, is
anything changing in my likely customer
base that will affect my future?
3. Will there be enough customers, now and in the
relevant future, to support my business in
the style to which I would like to become
accustomed?
4. Is there any ax hanging over my head that might
adversely affect my future?
5. Do I truly have the business concept and personal
skills and resources to pull this thing off?

CASE #7: While visiting Alaska, Joyce M became

fascinated with Eskimo artifacts. She became convinced
that many in her town would be similarly impressed. While
still in Alaska she made several initial contacts with
potential sources of products. Shortly thereafter she
returned to finalize her product line. She found an
affordable retail location and established the House of
Igloos. Joyce now jokes that she should have won the
Flubber award for lowest sales total by a new retail
concept. The House of Igloos melted in 4 months.

It is unkind but accurate to say that Joyce’s market

research stunk out loud. Part of her initial attraction was the

34
 Market Research

Alaskan ambiance and her personal interaction with native

Eskimos. These elements were obviously missing from her
shop. People in her town simply were not interested in the
products she carried.
Note that Joyce failed to get a yes answer to our
very first question (will anyone buy?). Even if a small core
of customers had developed, she would have likely fizzled
at question 3 (will there be enough customers to support
me?).
A similar fate can befall business start-ups that
involve inventions. Inventors, more or less by definition,
are product-oriented. They tend to be enamored of the
technological possibilities of mechanics and electronics.
They are much more likely to conceive a fascinating new
contraption than to carefully listen to the marketplace
before conceiving their fascinating new contraption. If the
contraption works as well as the inventor hoped, it is a
short analytic leap from there to the notion that “the
marketplace should reward me for my technical brilliance.”
Unfortunately, the marketplace often doesn’t give a hoot.
Note that today’s inventions may be “soft” rather than
hardware, things like computer software, information
services or other way stations on the information
superhighway. Nonetheless, the risk that the marketplace
does not care remains relevant whether the tech is high or
low.
Our next case illustrates the role of trends in market
analysis:

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Torpedo Avoidance!

CASE #8: Mac W desired to get out of his big city

rat race. He had spent his career with a men’s clothing
manufacturer and felt confident he could run a successful
retail clothing store. He found an existing store for sale
that seemed to meet his needs: good financial results, loyal
clientele, and strong competitive position. Mac took the
plunge and enjoyed three years of reasonable prosperity,
but his revenue was clearly trending downward. As time
passed, the situation became critical. Eventually Mac
merged with another merchant and finally sold his interest
to his new partner.

Mac’s problem resulted from trends in his customer

base that he had failed to anticipate. Mac’s town had only
two major employers, factories that were divisions of giant
companies located in distant cities. Both factories were
experiencing slow but steady decline in sales and
employment. Displaced employees were simply moving
away, a reality facing many small towns across the nation.
Had Mac asked the right kind of questions concerning
community trends, he could have anticipated the inevitable
erosion of his customer base.

CASE #9: During a vacation to California, Bryan

S. was dazzled by an attraction in which participants joined
two competing armies and waged laser gun war on each
other. After learning that the attraction had been
continually gaining popularity for over three years, Bryan
decided to bring it to his midwestern city (actually a bit
larger than the California city he had originally visited).
Electing not to consider a franchise, Bryan developed the

36
 Market Research

technology necessary to launch the business and put

together an impressive facility.
Early results were excellent, consistently at or
above expectation. However, after approximately 6 months,
sales began to lag. Efforts to improve results through
increased promotions were initially successful; but, again,
sales lagged after a short period. In just over a year, Bryan
was forced to close.

Bryan’s market research was excellent in several

respects, but he did not look deep enough. Essentially,
Bryan concluded that demand in the Midwest would mirror
demand in California. This assumption might have been
risky, but turned out to be true. He also reasoned that his
market size was large enough to support the business since
it was larger than the California market. This assumption
was initially true but contained a fatal flaw. As John
progressed, he learned there were four kinds of customers:
• Those who tried his product once and hated it
(about 15%)
• Those who became fanatic, long-term devotees
(about 20%)
• Those who really enjoyed the experience, played
several times, but disappeared in search of new
novelties (about 55%)
• Out of town visitors (about 10%)

In re-examining his market research, Bryan

realized, too late, the crucial difference between his
marketplace and that of his California model. Their percent
of tourists was much higher than his. Because they had an

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Torpedo Avoidance!

ongoing stream of tourists, they were able to attract enough

new clients to absorb the 55% “fall-away” problem Bryan
was facing.
There is perhaps no market research issue more
important than “likely repeat business.” Some businesses
can survive without a loyal, long-term customer base. Most
cannot. So these are vital questions:
• Will people who buy once, buy again?
• If so, can I reasonably expect them to continue
buying for many years?
• Is my perceived market value strong enough to
continue defeating competitors including new
competition attracted by my success?
• Are there any market trends that will defeat me?

There is another lesson in Bryan’s tale. There are

successful entrepreneurs who did not do well in
mathematics, but it sure helps to be comfortable with
analyzing numbers. Bryan’s dilemma involves relatively
sophisticated numbers analysis, a combination of repeat
business percentage and market segment analysis. Failing
to spot and analyze key statistics is a roadmap to failure.

CASE #10: Several years ago, Mary and Jack F

sought a small-town business and became owners of a
general merchandise store in Iowa. They were aware of an
emerging retail force called Wal-Mart that was building
discount stores in small towns across America. Mary and
Jack chose to ignore this danger and launched their
business. In less than two years, Wal-Mart was in town as a
direct competitor. Mary and Jack battled fiercely, but

38
 Market Research

simply did not have the resources to combat Wal-Mart’s

combination of selection, price, and promotional power.

The concept of researching potential axes hanging

over the head of your business is crucial. Axes can include
• New competitors
• Competitive retaliation to your business strategy
• Major changes in your market such as plant closings
or military base cutbacks
• Environmental regulations and related compliance
costs
• Rising costs that become unaffordable, for example
insurance, taxes and medical coverage
• Weather or other natural catastrophes
• Demand for skilled employees so intense that you
must pick your poison: pay unaffordable wages or
rely on uncompetitive employees
• Technical obsolescence such as that suffered by the
traditional typesetting industry as desktop
publishing hammered their traditional markets
• Changes in legislation that affect products or
services—for example, the collapse of many tax
shelter products after tax code revision or the
collapse of much of the solar energy industry after
elimination of government tax credits.

Any business start-up involves some risk that

unexpected axes may fall. Some potentially fatal axes may
not be foreseeable. But many are. The key is asking hard
questions and looking hard for the answers:

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Torpedo Avoidance!

• What are the key elements I’m counting on to make

this business a success?
• What could happen that would ruin my plan?
• What is the likelihood of that ax falling?
• Could I respond to that eventuality? Or would it
cause my business to fail?
• Am I willing to take that risk?

CASE #11: Larry O was an inventor who

developed a pump-driven painting system. His product
concept—much more heavy-duty than small “power
painters”—was aimed at the commercial painting industry.
It required about two years and considerable investment
capital to develop a working prototype. The capabilities of
the machine were indeed impressive. Larry worked
feverishly to put together a marketing plan. He first
considered retail paint stores where painters could rent the
machine. He also considered direct marketing to large
commercial painting contractors. Marketing efforts were
hampered by the limited number of working prototypes,
and a clear-cut plan proved elusive. At the same time,
Larry worked feverishly to finance a manufacturing facility.
He tried economic development funding, foreign investment
sources, and joint venture possibilities. At various points,
he came close to the right deals, but could never get all the
components put together. After seven years, the project was
finally scrapped.

This case involves the final element in our market

research package: Do we have the combination of resources
and skills necessary to bring our product to market? In Case

40
 Market Research

#11, the product was good. However, the required business

system was extremely complex and the entrepreneur failed
to pull it off.

CASE #12: Gwen C was restructured out of her

advertising agency. She decided to open her own agency,
feeling that her loyal clients would follow her and that she
could do well financially while charging much less than
“agency rates.” Her planned worked reasonably well,
although her former company was successful in hanging
onto some of the clients Gwen had expected to follow her.
To make the business work, Gwen needed to build some
new accounts. However, she was extremely uncomfortable
with the sale/marketing process and handled this part of
her business poorly. Gwen was also very weak in
administration, often failing to bill her clients on a timely
basis. She was also uncomfortable with aggressively
dunning her overdue accounts. She soon realized she
needed help to fill in her weaknesses, but limited resources
prevented her from adding staff.

Gwen’s business was a form of the growing trend

toward “consultancies” in which an industry veteran opens
her own service business. Typically these entrepreneurs are
very competent technically. Often they are truly
outstanding in their field. In general, their “product” will be
excellent, yet consultancies can fail just as Gwen’s failed.
Her market research included analysis of the product, but
failed to consider the overall package of resources the
entrepreneur brings to the project.

41
Torpedo Avoidance!

The Brighter Side

Let’s again close with some good news. Good
market research can yield stunningly good results. An
excellent example is being played out in Carmel, Indiana, a
north suburb of Indianapolis. Carmel has grown
dramatically over the past 15 years of so. About ten years
ago, well before it made any sense to most of us, a young
man named Chuck Lazarra quit a wonderful job and
launched a major banquet facility. He had analyzed his
market and projected several relevant trends:
• rapid growth
• economically upscale populace
• strong orientation toward sizable weddings and
social events
• eventual location of a major business center
including potential relocations of national corporate
headquarters
The facility design was impressive, exactly right for
the market. Service and food presentation were excellent
from the start, leading to extremely high customer loyalty
and excellent word-of-mouth referral business. The
location seemed terribly wrong to the uninformed:
essentially in a farmer’s field along U.S. Highway 31.
Today this section is called the Meridian Corridor, and
Chuck’s location is surrounded by major business facilities
that utilize the Ritz Charles for a multitude of reasons. The
original facility has been doubled in size, and more
expansion is planned including a facility in Kansas City.

Early in the personal computer explosion, an

entrepreneur named Dick Summe visualized growing

42
 Market Research

hunger for knowledge about the software that ran on home

computers. His Que Corporation became a hugely
successful publisher of how-to books (successful enough to
allow Dick to sell to MacMillan Publishing and cruise
Puget Sound in a “boat” large enough to allow his
Mercedes to cruise with him). Today, using the same
market analysis, entrepreneurs are providing the training
and technical support that allows mere mortals to
understand how to operate in the digital world.
It is probably a fair generalization that accurate
trend analysis is more important than an accurate snapshot
of your marketplace today. Earlier in this chapter, we
mentioned the technological revolution being created by
desktop publishing. Just a few years ago, the traditional
typesetting industry was selling extremely expensive
traditional systems. Many entrepreneurs wishing to enter
the field were told that “desktop will never replace real
typesetting,” and, therefore, a $100,000+ system makes
sense. (The truly aggressive E might have dropped another
$100,000 or so in a high-end color scanner.) However,
sharp trend analysis clearly pointed to the day that $10,000
worth of equipment would satisfy the needs of 90% of the
market. Those who bought right are likely enjoying a nice
ride on the crest of a powerful trend. Those who bought
wrong are wailing and gnashing their teeth. Similar
technological impact has been felt in the video production
field and among traditional advertising agencies.
Traditional photography is being impacted by the digital
world. The explosive growth of the Internet is creating new
winners and losers daily, with the impact on the traditional
travel agency business being a classic example. The

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Torpedo Avoidance!

automobile and real estate industries are watching and

wondering. It is crucial to project with reasonable accuracy
the impact of technology. And in a larger sense, it is crucial
to monitor all significant trends that impact your business.

To Ponder and Discuss

1. What are other examples of “ok ideas” brought down by poor

market research? Which aspect of research (page 34) was most
relevant?

2. Carefully reread case #9 (Bryan). It demonstrates the key role

that numeric analysis can play in small-business market
research. Be sure the concepts make sense. How does a business
statistic like “same store sales” in retail analysis illustrate the
importance of numbers analysis?

3. Why is market research so important in carefully positioning

highly creative, invention-type ideas? What are examples of
well-developed inventions? Give examples of inventions or
highly creative concepts that failed to reach a meaningful market
position? Why was hoped-for potential not realized?

4. Why might we argue that trends are more important than a

“right now” snapshot of a business? Give examples of key trends
affecting small businesses in today’s marketplace.

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 Chapter 3

Ineffective Marketing & Promotion

This chapter deals with another tragic possibility of

the entrepreneurial experience. The business graveyard is
full of good ideas that never found their way to market. The
bridge between concept and market is marketing; and it can
be an extremely tough bridge to build.
Book #3 of the Entrepreneurial Five Set deals more
extensively with marketing concepts and techniques. Here
we’ll focus on the role of marketing in success or failure.
At one level of analysis, marketing seems simple,
involving the answer to four basic questions:
• What is our basic business idea?
• What needs or wants will we fill in the
marketplace?
• What customer benefits do we offer that make us
superior to our competitors?
• How will we communicate our concept and
capabilities to prospective customers?
• How will we “close the deal”—the process of
actually inspiring the prospective customer to buy?

For small businesses, correctly answering these

questions is vital. Almost by definition, small businesses
must find a market niche in which to excel. Identifying that
niche and determining how to reach it is key. Most of this
chapter’s case studies look at small businesses. Here’s one

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Torpedo Avoidance!

in which the player was a giant; but the moral of the story
applies to the smallest start-up.

CASE #13: By the mid-1960s it was clear that IBM

was onto something in their computer business. Growth
and profits were phenomenal. RCA decided to grab a piece
of the pie. They hired some IBM people to lead the effort
and set about attacking the computer business. In effect
they said, “What’s good for IBM will be good for us,” so
the product line they designed was extremely broad, aimed
at competing with IBM across the entirety of IBM’s product
line-up. A very short time, and approximate $500 million
later, a badly beaten RCA closed its computer division.

RCA’s debacle might have been avoided if they had

hired a couple West Point graduates along with their new
IBM staff. Their business concept was akin to a battle in
the days of Roman power and glory. Imagine a battlefield
three miles wide. The Roman army stands shield to shield
across the entire three-mile front. More significantly, the
Roman army stands ten men deep across the entire front.
Their opponents stand across the field, ready to attack.
They also cover the entire three-mile front, maybe a little
more scattered-out than the Roman army; but, by golly,
they’re covering the whole front. But wait! They are only
one-man deep. They attack anyway! You don’t need Paul
Harvey to figure out the rest of this story.
In the mid-’80s, Apple Computer, by contrast,
carefully defined a market niche, formed their army into a
concentrated wedge, and blew right through a section of
IBM’s line. Compaq and Dell paid attention.

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 Ineffective Marketing

If Apple needed a niche strategy, it’s almost sure

that start-up entrepreneurs need one as well. So again,
• What is our basic business idea?
• What need(s) in the marketplace will we fill?
• What customer benefits do we offer that makes us
superior to our competitors?
• How will we communicate our concept and
capabilities to prospective customers?
• How do we inspire the customer to actually buy?

My own entry into the printing field demonstrated

the need for niche identification. The market ranges from
huge (companies that print Time magazine on presses
bigger than a barn) to tiny (individuals who print flyers on
tabletop equipment). Virtually every individual, company
or organization buys some printing, so market potential is
large. Unfortunately, there are also hundreds of
competitors. A printer who tries to be “everything to
everybody” is doomed, simply because various competitors
have focused on specific parts of the industry. The
specialist will almost always beat the generalist since their
investment and expertise are concentrated on their
specialty.
So we were forced to ask ourselves, “What part of
the market can we best serve?” We had entered printing
because we were publishing a small magazine. We also
were managing our own mailing list and handling our own
mailings. This capability became our niche: “We will find
organizations that publish magazines and newsletters. We
will help them design those products. We will provide

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Torpedo Avoidance!

editorial input if necessary. We will provide full-service

from design to printing to mailing.”
This market definition gave us a portion of the
market in which we had distinctive competencies vs. our
competitors. It also clarified our advertising approach.
Direct mail and personal contact made far more sense than
general circulation advertising vehicles.
After definition of our concept and market niche,
the next issue is reaching the customers. A remarkable
number of businesses are launched in the absence of a clear
promotional plan.

CASE #14: Paul P opened a retail record shop in a

suburban strip mall. Paul’s market research showed a
strong population of young adults who would be oriented to
his combination of pop, rock and traditional music. The
community was growing at about 5% annually, so trends
seemed positive.
Paul’s signage was not clearly visible from the
street, and the shopping center had no strong anchor store
that would pull traffic. Paul had initially hoped word of
mouth advertising would be strong, but he quickly
determined that more promotion was needed.
Paul first looked into TV advertising, but expense
was prohibitive as he was aiming at only the western edge
of the city. Similarly, the metropolitan newspaper was
impractical as it provided coverage Paul didn’t need and
couldn’t afford. The local suburban weekly was marginally
effective, but Paul learned that his primary customers were
much likelier to be reading the metropolitan daily. He tried
a series of specialty advertising vehicles such as coupon

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 Ineffective Marketing

packs, but returns were inadequate. Growing desperate,

Paul contracted with an advertising agency that put
together a multi-media package that included radio,
billboards and newspaper ads. The cost of this package far
exceeded its benefits and Paul, already strapped for cash,
found himself unable to afford additional marketing. He
folded his tent shortly thereafter.

The primary moral of Paul’s story is that he simply

did not have a plan. If he had been lucky, one of his efforts
would have borne fruit and the business might have
succeeded. Ironically, several months after he closed, Paul
learned of a record store in another city that was very
successful using a direct mail campaign that Paul could
have easily afforded. New start-ups will always involve
some amount of marketing trial and error. But there are
courses to take, textbooks to read, and competitors to study.
It is important to pre-plan an effective marketing strategy.
Our next case involves a remarkably common cause
of failure.

CASE #15: Sandra A opened a western-wear shop.

Her investment dollars were limited, and most start-up
items came in somewhat over budget. At the end of her first
week, after spending a fairly significant amount on her
grand opening, Sandra reached the horrifying conclusion
that she was virtually out of cash. Frightened that she
would be unable to meet her rent payments and other fixed
obligations, she cut her marketing budget to virtually zero.
Her primary competitor retaliated effectively and ran
significant sales during the early phase of Sandra’s start-

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Torpedo Avoidance!

up. Not surprisingly, business revenue was extremely weak

and, within a few months, Sandra was forced to close.

Both of these cases illustrate a crucial start-up

requirement. There must be a definite promotional plan and
adequate funds to implement that plan. To invest in the
development of the product or service; then to invest in the
facility; then to invest in hiring and training; and not invest
in the promotional program that will create a customer base
obviously makes no sense. Yet variations on this theme are
extremely common.
It’s probably worthwhile to ponder the
psychological reason for under-promotion in many start-
ups. About 98.6% of business start-ups will struggle with
cash flow problems. Often the E feels like a frantic juggler
trying to keep billing going out, money coming in, and
critical bills paid. Many demands for cash are extremely
insistent: the rent must be paid; payroll must be met;
withholding deposits must be made; sales tax must be paid
in; insurance premiums must be paid, etc. etc.! Marketing
and promotion is NOT an insistent creditor. You can put it
off for awhile while meeting more pressing cash demands.
Obviously this logic is deeply flawed because inadequate
promotion leads to diminished revenue and even harsher
demands on cash, but there is a powerful psychological
tendency to use your cash to grease the squeakiest wheels.
Effective companies realize from the start that they
must allocate a certain percent of revenues to marketing
and promotion. These expenditures are made according to a
carefully developed plan and other expenditures will be

50
 Ineffective Marketing

sacrificed rather than reduce the levels of marketing effort

known to be necessary to maintain sales momentum.

CASE #16: Jerry S opened a specialty meat

market. Jerry is a really funny guy, or at least he thinks he
is. One of Jerry’s dreams was to star in his own humorous
TV and radio ads. So, working with local stations, Jerry
wrote and produced his own ads. Jerry’s business revenues
have never been adequate.

Jerry surely represents one of the advertising

industry’s interesting ethical questions. He is a cash-paying
customer. This is a free country. He can do his own ads if
he wants to. But Jerry’s ads sounded goofy, and Jerry
looked and sounded goofy. Obviously many prospective
customers decided they didn’t want to buy meat from a
goofy guy. His promotional campaign just plain stunk,
arguably worse than no campaign at all.

CASE #17: Ginny and Frank started a garden shop

in an upscale community. Both are experts in the field, and
their shop was nicely located and well stocked. They faced
several sophisticated competitors, so effective marketing
was crucial. Frank studied a bit of marketing in college, so
was named their VP Marketing. Clearly, though, the shop
was losing ground to competitors. Ginny suspected the
marketing program was part of the culprit but wasn’t
confident enough to challenge Frank’s judgment. Things
went steadily downhill.

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Torpedo Avoidance!

Marketing, even for a very small business, can be a

complex subject. There are choices regarding proper
marketing mix: how much to allocate to advertising vs.
other forms of promotion; how much to rely on
promotional events; how to compensate customer service
people; how much to spend on point-of-purchase displays;
and much more. There are also important questions
regarding matching projected image to the expectations of
the marketplace. Frank, who probably got a C- in
Marketing 101, just wasn’t very good at it. His advertising
and printed materials were clearly not sophisticated. He
spent excessive amounts of money in hopeless attempts to
beef up sales of their weak product lines. His special events
usually involved coupon discounts which several upscale
clients found demeaning. He had implemented a sales
commission program for his retail sales people, causing
some customers to feel they were in a used car sales
environment. In summary, Frank’s more sophisticated
competitors were drubbing him in the marketplace.
Frank’s marketing problems illustrate two of our
fundamentals:
• The effort to attract prospective buyers was not
effective.
• Many prospective buyers, even if inspired to contact
the company, were lost because of ineffective
salesmanship.

The process of inspiring a buy decision is complex

and varies widely depending on industry, but it can be the
single most important element of the marketing mix.
Understand the process well and make it work for you.

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 Ineffective Marketing

Note that a marketing expert of even marginal

credentials could have done wonders for either Jerry, our
TV pitchman, or Frank. It is not a crime to be wrong about
the effectiveness of a marketing or promotional program. It
is a crime to continue the program in the face of clear
feedback that it is not effective. Once ineffectiveness is
clear, it is mandatory to set ego aside and secure the help
necessary to plan and execute an effective campaign.

To Ponder and Discuss

1. Why is niche marketing so important to small business? Give

examples of effective niche definition and exploitation.

2. Give at least two reasons that cause small businesses to have

“stop-go” marketing/advertising programs.

3. What are the pros and cons of featuring yourself in your

advertising?

4. Why is media selection a tough issue for small businesses?

What are the key criteria of a good selection?

5. List five different businesses in terms of the process of final

customer decision making. When is hard-sell necessary? When is
soft-sell more appropriate? What are the skill and motivation
requirements of the sales/marketing employees involved in
customer communication?

53
 Chapter 4

Excessive Ego

Sometimes the role of ego is as clear-cut as Jerry’s

problem in Chapter Three. He was a lousy TV pitchman
and he should have gotten his dreams of stardom out of the
way of good business sense. But this subject is much more
complex than that.
Some people spit out the word ego as if they had
just drunk some sour milk. Apparently their parents
convinced them that ego is the opposite of humility.
Humility is good, therefore ego is bad. At the risk of
offending those worshiping at the shrine of humility, I will
advance these notions regarding becoming a successful
entrepreneur:
• Ego is not a bad word. My thesaurus lists these
words under ego: dignity, pride, self-esteem, self-
regard, self-respect. That doesn’t sound so bad.
• Yours had better be pretty solid.

To me, here’s where ego can get a bad name. Let’s

say I’m chatting with some of my buddies and I say, “Ya
know, I was a pretty fair basketball player in my day. I’ll
bet twenty bucks I could beat Michael Jordan in a game of
one-on-one." That kind of thinking would assuredly get me
branded an egotist. It would fully justify every negative
connotation you could apply to the notion of ego. And it
would cost me twenty bucks if Michael should happen by.

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 Excessive Ego

Now let’s say Michael Jordan is chatting with some

of his buddies and he hears that this guy named Corbin is
looking for a showdown at high noon. He says, “Ya know,
I was a pretty fair basketball player in my day. I’ll bet
twenty bucks I’ll beat Bill Corbin in that game of one-on-
one.”
Obviously Michael just exhibited some ego. Is that
bad? To me, it was merely a justified expression of
confidence in himself and the years he spent honing his
skills. (It might also indicate he had a good scouting
report.)

There are three simple reasons why the entrepreneur

must have a substantial, solid ego:
Simply starting a business is an expression of ego.
Your name goes on the sign. Your signature goes on the
bank notes. You are saying, “I have confidence that I can
launch this business and lead it to success and prosperity.”
Along your entrepreneurial path you will stumble,
fall and get bruised. Your ego—exhibited in confidence,
toughness and faith that you can get up, dust yourself off,
and go on—is crucial to surviving the tough spots.
My own career clearly demonstrates a third role of
ego that, hopefully, you will not need to experience. Every
business start-up carries with it a risk that the business will
fail. We must not dwell on that risk. We must not be
paralyzed by fear of it. But we must not start the process
without fully understanding the possibility of a negative
outcome. If, as happened to me, the bottom falls out of the
dream, you face one of life’s genuine gut-checks. Some
answer this moment very badly, resorting to booze, drugs,

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Torpedo Avoidance!

even suicide. Some become abusive to friends and family.

Some are forever embittered toward life. Some curl up in a
psychological ball, never able to regain their confidence
and self-esteem.
Very early in the entrepreneurial process—briefly,
but with brutal self-honesty—you must project yourself
mentally to that horrible day. You must ask and answer the
question, “How will I handle it if my business fails?”
For those with solid ego, the answer can be
relatively happy. When Concepts 4, Inc. bellied up, I went
into a brief period that was somewhere between shock and
grief. I took stock of my life and goals and decided not to
abandon the entrepreneurial dream. Shortly thereafter, on
extremely limited capital, I launched the enterprise that has
led to a successful entrepreneurial career.

If my career demonstrates the positive role of ego, it

also demonstrates the negative role. Looking back, I was
the Bill Corbin who thought he could beat Michael Jordan
in basketball. Up to the point of launching Concepts 4, Inc.,
my life had been a string of successes in athletics,
academics and early business career. As I launched my
business, I truly felt, “If I thought of it, and if I work hard
at it, it will be successful, just like the other phases of my
life.” The problem, of course, was that my confidence was
not justified. I was not an experienced entrepreneur. I was
trying a brand-new business concept. It was just plain
wrong to conclude that prior successes assured a successful
outcome. Yet unjustified confidence prevented me from
seeking advice and tough analysis from seasoned
entrepreneurs. In hindsight, the flaw in my concept could

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 Excessive Ego

have been, and should have been, identified by tough

analysis.

CASE #18: Phyllis opened a small manufacturing

facility to produce a line of craft products. Phyllis’
background was wholesale marketing for a large craft
distributor. She carefully defined a market niche and
invested in the right equipment and people to produce her
product line. Phyllis’ personal style was very hands-on in
every part of her business. She was abrupt—some said
downright abrasive. She also had high regard for her own
capabilities.
Phyllis clashed constantly with her original
production manager, who brought strong credentials to the
business but was also a very strong personality. After four
months, this manager resigned and Phyllis brought in a
more agreeable person. Similar problems were occurring
in Phyllis’ administrative department. Her manager was
disagreeable, constantly arguing when Phyllis attempted to
implement systems and procedures. Soon this position
turned over as well.
The business was soon known in the industry as
very strong in sales but weak in manufacturing and
administration. It eventually floundered and failed because
of poor delivery and quality control.

Phyllis represents a classic example of several

common entrepreneur traps.
• Many Es are extremely hands-on: likely to be involved
in the decision-making process in every phase of their
business.

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Torpedo Avoidance!

• Many have strong personalities and brimming

confidence that overpowers the input of underlings.
• Many are so driven that they lack patience with input
that seems to be causing time-wasting disagreement and
conflict.

In Phyllis' case, she had one count of justified ego

(marketing) and two counts of unjustified ego
(manufacturing and administration). Her business soon
reflected her personal strengths and weaknesses—a
common trait of start-up businesses—and eventually the
weaknesses killed the business. She badly needed to learn
to control her ego and fill in her own weaknesses with the
skill of competent employees.
Phyllis' one-dimensional strength and multi-
dimensional weaknesses can crop up in consultancies (Case
#14, Chapter Two). By definition, the entrepreneur-
consultant brings specific expertise to his new company. It
is common that he also brings weaknesses.

CASE #19: Paul launched a mail-order business

having a vaguely defined mission of “specializing in highly
useful, highly unusual products.” Paul was an incurable
optimist who felt sure his plan would work. He moved
slowly to sharpen his marketing vision. He assumed some
investment capital would soon be forthcoming from a friend
who had promised it. It never did. Finally, despite poor
results, he hung on for many losing months, assuming he
would find the elusive key to success.

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 Excessive Ego

Paul’s ego took the form of unjustified optimism.

At virtually no point in his entrepreneurial odyssey was
there reason to think he had a good idea, knew how to grow
the business, or knew when to close it. He simply remained
optimistic until the bow of his ship bubbled under the
surface.
The solid ego must certainly include optimism, but
it must be surrounded by a hard edge of realism.
A fair summary of this entire foray into psychology
might be this:
A solid ego is vital to get us started, to keep us
going, and to pick us up when we fall. It becomes excessive
when it
• Causes us not to seek objective information that
may be disagreeable
• Causes us to downplay objective information that
we find annoying or disagreeable
• Causes us to overwhelm employees in a way that is
harmful to morale and/or cuts us off from their
objective input in the future
• Blinds us to objective analysis
• Causes us to postpone difficult decisions or actions
because of excessive optimism

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Torpedo Avoidance!

To Ponder and Discuss

1. Think of the leadership styles of people you know or have read

about. When has ego been an important leadership trait? When
has it become negative? Why?

2. Where do you personally stand on the ego spectrum? Do you

need to strengthen traits such as confidence and assertiveness?
Or might you need to throttle back the ego machine?

3. What specific life experiences have shown the role of your ego
in leadership style? Could you have performed better had you
adjusted the ego involved?

4. Do you think entrepreneurs should usually project their own

personal identity in the marketplace? Why or why not?

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 Chapter 5

Too Little Time to Learn

Most books on business start-ups cover this topic

under the category of “under capitalization.” As we’ll see,
“too little money” and “too little time” are essentially
synonymous, but I believe the “too little time” concept is
useful when understanding the cause of business failure.
Coaches are fond of using phrases such as “My
team is never a loser, but sometimes we run out of time.”
This sentiment is relevant to a large number of small
business collapses. If we eliminate two categories of
failure...
1. A horrible idea in the first place and/or
2. The owner has no clue how to make it work and never
figures out where to get a clue…
then a large percentage of failed small businesses simply
run out of time before they get it all together.

Start-up capital must serve these purposes:

• Initial investments such as equipment, facilities,
franchise fees, or buyout agreements
• Initial marketing thrust
• Ongoing payments such as payroll, rent, utilities
(etc. etc.) prior to the time that cash flow supports
these payments—an operating “cushion.”

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Torpedo Avoidance!

The subject of business finance can be extremely

complicated. However, we can use a hot dog stand to
demonstrate the key issues facing many start-ups.

Fictional Case #1: We learn that a new tourist

attraction is about to open in our city. While perusing the
local paper, we learn of a traffic study that indicates a huge
projected increase in traffic on the road leading to the
attraction. We decide to open a hot dog stand on that road.
Aware that entrepreneurs must be willing to dive into
numerical analysis, we do the projections.

Our Pro-Forma Financial Plan:

It turns out to be pretty easy to put together hard
numbers on our facility requirements:
The Stand $20,000
Signage & Fixtures 3,000
Equipment 6,500
Miscellaneous 500

TOTAL $30,000

Our marketing plan involves very little advertising

since people will see us from the highway, so we’ll kick
things off with a grand opening marketing blitz.
Local ads $1,500
Printed flyers 300
Miscellaneous 200

TOTAL $2,000

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 Too Little Time

Our monthly operating costs are projected to be

Rent $1,500
Utilities 500
Payroll 2,000
General & Administrative 500
Miscellaneous 500

TOTAL $5,000

Aware that the attraction won’t open for 3 months

and that it’s a good idea to have a little extra to cover
unexpected problems, we determine $50,000 to be our
required investment:

$32,000 for our front costs

$18,000 operating cushion

We estimate our average sales per car will be $8.00

and our out-of-pocket food and packaging costs will be
$2.00, so we’ll have $6.00 of gross margin on every client.
The traffic study says there are 500 cars per day
going down our road now, and this number will jump to
2,000 per day when the attraction opens.
We are confident—based on an article in our trade
magazine Hot Dog Stand Weekly—that one car in 50 will
stop at our location. So the numbers look pretty good:
2,000 cars/50 = 40 customers daily x $6.00 margin
= $240 per day x 30 days = $7,200 per month
- $5,000 fixed overhead
= $2,200 per month profit x 12
= $26,400 per year on a $50,000 investment

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Torpedo Avoidance!

We’re LOOKIN’ LIKE GENIUSES!

But let’s be sure we’re OK during the period before
the tourist attraction opens.
For 3 months, traffic is only 500 cars. One in 50
will stop, so we’ll have 10 customers per day.
10 customers x $6 margin/customer x 30 days =
$1,800 per month of gross margin.
$1,800 - $5,000 (fixed costs) = -$3,200 per month.

We’ll lose less than $10,000 in the first 3 months,

so our cushion of $18,000 looks like plenty! It’s a great
plan. Let’s go for it!
As most grizzled Es will tell you, here’s the likely
reality. The contractor comes in a little over estimate,
costing us $3,000 more than we budgeted. It turns out there
is a bit more to getting our permits than we realized. In fact,
we needed $2,500 for a lawyer and $500 in unexpected
fees. So we’re getting started at $6,000 more than our
budget.
Still, we should be OK, because our cushion was
$18,000. Now it’s down to $12,000, but our projected
3-month losses are less than $10,000.
We open and quickly learn that it takes a bit longer
than we anticipated for our people to become expert hot
dog cookers. In fact, our waste is so high, we’re only
grossing $5.00 per car rather than $6.00. That means we’ll
only make $1,500 per month during our first three months
rather than $1,800. Losses will be $10,500 vs. our revised
cushion of $12,000. Things are getting tight!

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 Too Little Time

So we limp through the first three months with a

cash balance heading rapidly toward zero. In rapid
succession we are hit with these grim realities:
• There has been a one-month delay in the opening of the
tourist attraction.
• The 2,000-cars-per-day estimate we were counting on
was really a best-case estimate advanced by an eager
member of our Chamber of Commerce. In fact, it will
take several months for the attraction to build to 2,000
cars per day. Worse than that, we learn the study didn’t
mean to indicate that AVERAGE daily traffic would be
2,000 per day. They have no idea what will happen
when the weather is bad, for example.
• The article we read in Hot Dog Weekly had a tricky
statistic we missed. One car in 50 will stop…after we
have successfully built a loyal clientele over a period of
approximately 3 months. Until we have significant
repeat business, one car in 125 will stop.

Based on my experience as both observer, and

veteran, of entrepreneurial startups, something very similar
to Hot Dog, Inc.’s scenario is likely to occur. Now and then
reality meets or exceeds pro forma expectations, but it is
extremely rare.
Like an athletic team that is behind on the
scoreboard, our Hot Dogs, Inc. has problems to address:
• We’re losing more per month than we thought
during our pre-tourist-attraction phase.
• We’re going to have at least one more month of
these losses because the attraction is opening late.

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Torpedo Avoidance!

• We’re likely to have 3 months or more of revenue

far under projections while we build a loyal
clientele and the tourist attraction builds its
customer base.
• We should beef up our initial marketing budget for
at least two reasons:
—To attract more people in the first place, maybe
including people who live in neighborhoods near
the stand
—To invite them back right away, perhaps via a
coupon promotion
• Since traffic count will be lower than we
anticipated, we should consider new products to
improve our average sales per customer. Of course,
we’ll need some more equipment and inventory.

All these things are do-able. An aggressive,

carefully thought-out action plan can possibly solve our
problems and allow us to build a profitable business. BUT
WE ONLY HAVE $500 LEFT! Our strategic options are
now three:
• Come up with more capital
• Close our doors
• Find a person who hasn’t read Chapter One of this
book to see if they would like to own a nice hot dog
stand (just kidding)

Most of us have heard variations on this rule of

thumb: A new project will take twice as long as
anticipated and cost twice as much as originally
budgeted. Certainly no generalization can cover every

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 Too Little Time

business start-up, but the odds are extremely high that your
business will cost more to launch and will launch more
slowly than you projected.

Some Financing Alternatives

The lesson to be learned from Hot Dogs, Inc. is this.
Our financing plan needs an additional element. We need
• Initial Investment
• Initial Marketing Thrust
• Operating Cushion
• Cushion for the Cushion

Unfortunately, most crystal balls are too murky to

tell us specifically how much cushion for the cushion we
need. The only answer is some form of contingency
funding. Among typical approaches are these:
Self Financing: You mentally divide your
investment into two parts: (1) anticipated budget, and (2)
additional amount you are willing to invest to cushion
against unexpected start-up problems.
Lender Financing: Your initial business plan and
original loan amount is clearly stated and justified. You
equally clearly state the contingencies that could require
additional funding of $ XXX. A clear prior arrangement is
made, complete with your plan for securing the amount, in
the event the contingency funds are needed. Often the
contingency funding is handled as part of a pre-approved
line of credit (discussed further below).
Equity Financing: You sell a certain percentage of
ownership in the business to one or more investors. The
first payment is intended to support start-up, but you make

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clear the possibility that additional start-up funding will be

necessary. You secure a pledge for that additional
investment if needed. Three approaches are common within
this alternative:
• The original investors agree to buy additional
ownership in the company.
• The investors agree to loan money to the company
directly.
• The original equity partners agree to cosign a loan,
often in the form of a line of credit, for the
company.

There is a powerful reason for securing prior

agreement for contingency financing. Without it, when
Hot Dogs, Inc. runs out of money, we must return to our
bank or investors with our hat in our hand, “Uh, well, we
sure raced through that money fast. Now we’re broke. Got
any more cash?” Their attitude is far better if we can say,
“The project is coming together. Developments have been
slightly slower than we hoped but are well within the
guidelines we envisioned. We’ll need to exercise the
secondary financing portion of our start-up plan to
complete the plan.”
The possible need for additional financing also puts
pressure on partnerships within the business and on
marriage or other personal partnerships (Chapter Seven). It
is crucial to have clear understanding about...
• The possibility of additional financing
• The potential amount of this financing
• The source of this financing

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 Too Little Time

But No Good Money After Bad

Let’s now grapple with one of the genuine “thin
lines” entrepreneurs must walk. We can again use the
Corbin experience in Concepts 4, Inc. My original
investment came from personal savings plus two investors
who bought 15% of the business. This amount of money,
along with new revenue, allowed the business to operate for
about nine months. Realizing that money, and therefore
time, was running out, I returned to the original investors to
discuss an infusion of additional cash. They listened
carefully to the situation and the need and turned me down
cold. I then took out a second mortgage on our home to
raise enough money to continue operation. Six months
later, this money was gone and the business collapsed.
Here’s the thin line: A business must have time to
learn to be successful. This time must be bought with
money. The successful entrepreneur must, therefore, come
up with the money necessary to buy that time. But the
additional time should be purchased only if there is a
reasonable chance that the result will be positive. My case
reminded me of a conversation I overheard recently:

“Hey, Ralph, how’s the family?”

“Fine, thanks.”
“Where’s Ralph, Jr., nowadays?”
“Up at college.”
“Still? Well, gosh, how old’s young Ralph by
now?”
“Twenty-five.”
“Must be working on his doctorate by now, right?”

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Torpedo Avoidance!

“Nope, still a sophomore, he’s still tryin’ to find

himself, whatever that means.”

It did not matter how much money I threw at

Concepts 4, Inc. It was a bad idea that was going nowhere.
When I asked my investors for additional money, they
looked at the trends and found absolutely no clue that
additional investment would turn the situation around. They
realized I was a 25-year-old sophomore and wisely
declined my request. I foolishly threw additional good
money after bad...to absolutely no avail.

The Tragedy of Wasted Time

The first chapter of Entrepreneurial Leadership:
Fundamentals deals with the crucial need to carefully
invest personal time, especially during start-up. Over the
years, I have watched fledgling Es spend hours on minor
details such as business card design and precise wording
for the advertisement in a high school yearbook. It is
crucial to dedicate time to the central issues important to
firmly establishing your business in the marketplace. Every
day can be crucial and there are only 18 working hours per
day (hopefully just joking, but it happens). The point, of
course, is using every minute to develop key personal and
corporate skills, then to apply those skills to success in the
marketplace.

Entrepreneurial Savvy
E savvy is the combination of wisdom and gut feel
that separates veterans from rookies. Some Es seem to be

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 Too Little Time

born with it. Some gain it quickly and some slowly. Some
remain clueless.
In a host of business failures, the real culprit is lack
of savvy. A very partial list of the possibilities include:
Signing a bad contract
Ignoring the legal risks associated with contracts,
labor law, governmental regulation, copyright law, etc.
Losing key employees based on immature policy or
behavior
Losing key accounts based on immature policy
decisions.
It is vital that the E aggressively seek savvy,
whether by formal study, mentor assistance or simply
paying close attention and taking careful notes.

To Ponder and Discuss

1. Why are money and time directly linked when thinking of

successful business start-up?

2. Do you have a back-up plan in place if additional capital is

needed for your business?

3. Are you systematically, aggressively attacking the problems

that can slow business growth?

4. Analyze your personal work habits. Are you highly effective in

use of time? If not, what areas can be improved?

5. Assess your “savvy quotient.” What are you doing to

improve?

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 Chapter 6

Poor Customer
Relations/Policies

Here is a classic comment delivered to me by a

fellow business owner (who was in serious need of a
tranquilizer): “Bill,” he bellowed, “I wouldn’t mind
running this [blankety-blank] business if I just didn’t have
to deal with customers.” Newcomers to the E world find it
unbelievable that anyone would be negative toward their
own customers. Veterans understand completely.
Most small businesses have a genuine love-hate
relationship with customers. The love side certainly
involves dollars. But an additional reward of business can
be sound relationships, even friendships, with wonderful
clients. The hate side can come from a variety of issues:
• Some customers are extremely pushy, demanding
more quality and service than they are willing to
pay for.
• Some are unreasonable in their demands for
delivery and other services, perhaps obnoxiously
threatening you or your employees with loss of their
business if the impossible is not accomplished.
• Some are downright dishonest in their business
dealings.
• Some are so rude they can devastate the morale of
your employees (or you).

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 Customer Relations

And so, business owners struggle with an ongoing

dilemma: My customers are my lifeblood. I know I must
create a large base of loyal, repeat customers. But some of
them are driving me crazy psychologically, and others are
taking advantage of me financially. Finding the right
balance is crucial. In addition, as discussed at the end of
this chapter, some businesses involve risk of over-
dependence on one or a few customers.

CASE #20: Dorothy owned a small apparel shop

for women. Her shop location was near a variety of
neighborhoods, so Dorothy tried to stock a broad range of
prices and styles. In the past two years, Dorothy had four
cases in which she knew customers bought dresses, wore
them to special occasions, and then returned them because
they didn’t fit. She also lost $420 in bad checks. As the last
straw, Dorothy discovered two younger customers who
were stealing underwear, bathing suits and even blouses by
trying them on, then putting their own clothes over the
stolen items.
Fed up, Dorothy implemented a no-returns policy.
She quit accepting checks unless she knew the customer
personally. She implemented a “2 items only” policy in her
dressing room and required her clerks to monitor the items
taken into and returned from the dressing rooms. Very
shortly after these policy changes, Dorothy noted a
dramatic decrease in business.

Dorothy’s response and the marketplace’s response

to Dorothy are typical and raise several issues:

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Torpedo Avoidance!

Dorothy’s new policies harmed her competitive

position. The elimination of returns, check cashing
privileges and liberal dressing room privileges reduced the
value customers received from Dorothy. They were soon
drawn to competitors offering more value.
A more subtle change occurred. In an earlier day,
Dorothy had been more positive, more upbeat. Her
employees reflected her mood, making her shop a pleasant
place for customers. As she grew increasingly negative
toward the behavior of some customers, Dorothy’s whole
demeanor changed. The mood in the shop turned sour. Her
employees commented behind her back that they felt more
like policemen than salespeople. Customers sensed the
mood change.
Dorothy’s response was driven by emotion rather
than financial analysis. She did not weigh:
• How much are customer problems costing me?
• How much might restrictive policies cost me in lost
business?

In effect, Dorothy was like the minister who berates

the congregation for poor attendance. She allowed the
misdeeds of a tiny minority of her customers to affect her
business relationship with her good customers.
Note that Dorothy was not necessarily wrong to
change her policies. New policies might be imperative if
theft or other misdeeds by customers are threatening
survival.

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 Customer Relations

CASE #21: Jack owned a printing company catering to

small businesses. Jack was an extremely profit oriented,
cost-conscious businessperson. He repeatedly clashed with
customers who complained about printing quality. Jack’s
philosophy could be summarized, “If it looks decent and
they can read all of it, why would they belly-ache.” When
customers complained, he battled hard to convince them
the work was good enough and they were being
unreasonable. If they pushed hard enough, though, he
reluctantly issued refunds or re-ran jobs. Jack found he
was consistently losing customers to his competitors.

Jack is not unusual in the sense of his profit

orientation. A sizable percentage of entrepreneurs are so
profit oriented they will squeeze every possible nickel. The
squeeze makes sense when applied to functions such as
purchasing wisely and manufacturing efficiently. It
becomes more dangerous when it involves long-term
customer relationships.
Note that Jack definitely saved money by avoiding
refunds and reruns that a competitor might have readily
agreed to. It is also true that some customers are being
unreasonable and an adjustment should not be necessary.
However, there is strong evidence that Jack was not using
good judgment in determining when to adjust and when to
hold firm. In fact, he seems to have consistently violated an
excellent customer service guideline:
If you face a situation in which the customer is
displeased and achieving customer satisfaction will cost
you money, you have three alternatives:

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Torpedo Avoidance!

1. Smile graciously, even if you think the customer

is being unreasonable, and make the necessary adjustment.
Outcome: You lose your money but you save your
customer and future business.
2. Hold firm. The customer is not being reasonable.
It does not make good business sense to offer the
adjustment.
Outcome: You save your money but risk losing your
customer.
3. Make it clear the customer is an unreasonable
jerk, then grudgingly give the adjustment.
Outcome: You lose your money and your customer.

The Times Seem to Be a Changin’

As a long-time veteran of small business, I believe
the dilemma of handling customers is growing more serious
each year. Perhaps the “me generation” has now grown up
and is making its selfish demands on business. Politicians
and others talk about the collapse of “values education.”
Perhaps some of the new breed of customers simply don’t
understand how things ought to work in a sound business-
customer relationship. Whatever the reasons, it is
increasingly tough to find the right mix of customer service
policies.
For small business, however, there is a practical
strategic issue that often mandates bending over backward.
Outstanding customer service is our most affordable
competitive advantage, particularly while financial
resources are limited. We may not be able to afford the
facilities, equipment or inventories of our larger

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 Customer Relations

competitors; but we probably can afford to provide superior

service for customers; a combination of

• customer-oriented policies
• friendly atmosphere
• well-trained customer service people
• a product/production commitment to meeting the
needs of customers

Tom Peters, in his “Excellence” studies, finds

customer orientation and excellent service to be the most
consistent theme among excellent companies. Therefore,
despite the truth that some of our customers will behave
like the south end of a northbound horse, we vastly
improve our odds of success if we find ways to serve our
good customers extremely well.

Over-dependence
In many industries, the rule of 20-80 applies to
customers and revenues: 20% of the customers will provide
80% of the revenue. For some businesses, the ratio is more
dramatic. Some years ago, a local printing competitor grew
astronomically by adding two giant accounts in a short
time. These accounts generated well over half of all sales
volume. Unfortunately, in a short period, one account
entered liquidation bankruptcy and the other was acquired
by an out-of-state. Unable to meet greatly increased
overhead costs (which had been added to serve the two
accounts), the company failed.
This is a tough entrepreneurial dilemma. If your
small company is approached by a Fortune 500 giant

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Torpedo Avoidance!

interested in working with you, every instinct says, “jump

at the opportunity” and jumping may be the right decision.
But it is equally important to ask constantly: “What will I
do if this account is lost? Can I replace the sales volume
relatively quickly? Can I reduce overhead to adjust for the
volume loss?” A related reality is the balance of power
between entrepreneur and customer. The owner of a dress
shop enjoys relatively high power in the business-customer
relationship. A small business dealing with a multi-billion
dollar customer soon feels like the 800-pound gorilla has
been invited to dinner.

To Ponder and Discuss

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 Customer Relations

1. What is your personal attitude toward difficult

customers? Do you allow difficult customers to cloud your
view of customers in general?

2. What policies have you developed to control problem

customers?

3. If a customer has a major disagreement with your

employee and reports the matter to you, is it your instinct to
side with customer or employee? Why?

4. What follow-up would you do in evaluating the

customer-employee conflict?

5. Why is investment in customer service a potentially high-

impact investment for small business?

6. Do you face potential over-dependence on one or a few

accounts? What are your contingency plans for the
possibility of losing significant sales revenue?

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 Chapter 7

Partnership Problems
Business or Personal

Many first-time business owners experience a

powerful urge to join forces with one or more partners. For
our purposes, “partner” will include either
1. Literal partnerships, one of the three primary forms of
business organization (corporation, sole proprietorship,
partnership), or
2. Start-up corporations in which working managers hold
approximately equal shares of the corporation’s stock

As we’ll discuss, there can be excellent reasons to

enter a partnership, but for many prospective entrepreneurs
there is a psychological issue that must be understood then
carefully examined. Launching that first business can be a
frightening prospect. There is some similarity to that
feeling we’ve all had, late at night, as we enter our dark,
empty house (add a couple howling dogs and some wind,
and the picture is complete). We’ll go in alone if we must,
but it would be comforting to have someone there with us.
Once inside, we turn on the lights, confirm that no goblins
were lurking in the shadows, build a fire and turn on the
stereo. Suddenly being alone isn’t so bad after all. Fear is a
very poor motivation for entering a long-term business
partnership. The original fear passes quickly once we’re

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 Partner Problems

into the project. If the partnership choice was unsound for

other reasons, we have new, real long-term reasons to be
fearful.
I have personally chosen the path of solo
entrepreneurship. Others have entered into very successful
partnerships. The correct decision is a personal matter
based on goals and leadership style. The only certain
advantages of going solo are these:
• If things go really well, you don’t have to share the
profits with a partner;
• If things go badly, you don’t have to bicker and stew
about who screwed up; you just look in the mirror.

CASE #22: Martha and Beth were long-time

friends going back to college days. Both were looking for a
fresh career path; and both were interested in interior
decorating; so they decided to go into business together.
They formed a 50-50 corporation, each investing
about $20,000. Early operations were smooth. Both had a
wide set of acquaintances, so they were able to build their
client base quickly. In fact, the business showed a profit
starting in its second full quarter. The friends seemed to be
very compatible personalities and outsiders viewed their
partnership as a “business marriage made in heaven.”
Inside the business, things were less rosy. Martha
had grown up in a lower middle-class neighborhood and
was highly motivated to earn a great deal of money. Beth
didn’t care much about the profit issue as her finances
were very secure and she was an avid competitive skier.
She had entered the business to find some fulfillment in the
career portion of her life.

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Torpedo Avoidance!

The difference in goal structure soon became a

major issue. Martha worked long hours, including
weekends. She soon resented Beth’s weekend trips to skiing
events. Beth found herself feeling guilty when she enjoyed
her hobby, even though she worked at the business for
nearly 40 hours weekly.
When the business earned profits, Martha insisted
that every dime should be reinvested in business growth—a
better showroom, advanced computer systems, more
employees. Beth preferred to take profits out of the business
for ski trips or family vacations.
Martha drove employees very hard to assure
maximum efficiency and profitability. Beth was much more
laid back. Soon employees formed a decided pro-Beth, anti-
Martha attitude.
Eventually the pressures caused by incompatibility
caused the partners to decide to go their separate ways.

CASE #23: Stu and Phil were golf-playing buddies

who worked as sales people for competitive clothing
manufacturers. They decided to open a “manufacturers
representative” business as equal partners. They shared
two goals: to earn a bit more money and to have more time
off to enjoy golf and their families. They felt their business
idea was perfect. They would work hard in the early days to
build new clients; then, once the client base was well
established, either of them could handle ongoing account
service while the other was away.
The business plan developed as expected with early
results even better than projections. They were
approximately equally successful in establishing new

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 Partner Problems

accounts. They seemed to work well together. The future

looked bright.
As they entered entrepreneurship’s “phase two,”
however, an unexpected complication arose. Indeed the
business was requiring less outside sales effort. A strong
percentage of sales came from call-in inquiries from their
established accounts. One of the partners could handle
these inquiries except during their very busy seasons. But
their sales growth brought with it new demands on their
administrative systems. Their invoicing activity was up.
Monthly statements were needed. An aggressive debt
collection program was necessary. They needed to plan
and implement printing of an increasingly complex
catalog/price list. Stu, while an excellent salesman,
couldn’t balance his own checkbook. The pressure of
administration fell totally on Phil. Through time, the major
imbalance of workload caused Phil to increasingly resent
the 50% of proceeds Stu was receiving. Eventually friction
killed the partnership.

These cases illustrate the three greatest dangers to

partnerships:
Incompatible Goals: Two (or more) people with
dramatically different goal structures likely face
irreconcilable differences. If one partner dreams of a $20
million empire and the other would be content at $1 million
and a club membership, we have real problems. If one
partner wants to withdraw every possible penny and the
other wants to reinvest every penny, there is no likely
compromise that will work.

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Torpedo Avoidance!

Incompatible Styles: Sometimes “odd-couples”

work in partnerships if they are mutually tolerant and if
their contributions clearly fill areas of weaknesses in the
other partner. Often incompatible styles cannot fit into the
same business. Some examples:
—One partner is extremely ethical in every dealing.
The other thinks it’s OK to shade a bit.
—One partner has a tyrannical management style.
The other treats employees like family.
—One partner is a driven, type A workaholic. The
other subscribes to the Jamaican approach to life:
“No problem, mon."

Unequal Contribution: Most partnerships are

launched with a simplistic “equal-in, equal-out”
assumption. This may be true initially; but, through time, it
is virtually certain that one partner's contribution will
outweigh the others. Unless a partnership agreement has
been carefully structured to include extra rewards for the
partner who is contributing more, there will be intense
pressure on the relationship. The most elementary book on
forming partnership arrangements will stress the need for a
"buy-sell" arrangement in the event of the departure of one
of the partners. Certainly this is sound advice, but equally
imperative is an agreement on the long-term compensation
system.

Pros and Cons of Partnerships

A sound partnership (looked at from your
entrepreneurial standpoint) offers these advantages:

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 Partner Problems

• You have an associate who is equally committed to the

business. She will work from early AM to late PM to
get the required job done without complaining or
demanding overtime pay.
• If cash flow is tight, you have a key employee who will
work for meager wages.
• You have a key employee who will contribute
immensely to the business and will not elect to quit her
job and start a company in competition with you.
• You have a committed associate who will watch over
the business while you vacation occasionally. Should
you become ill or otherwise incapacitated, you partner
will mind the store.
• In times of crisis, you have a soul mate for help and
encouragement.
• If your buy-sell agreement is sound, you have a
prearranged long-term plan for the continuity of the
business when either partner retires, is disabled or
expires.

The solo entrepreneur may have none of the above;

however, there are two primary arguments for going solo:
• You avoid the risk of an unsound partnership: the
possibility that you might pick a poor partner or (perish
the thought) the possibility that you might be a poor
partner because you are not temperamentally suited to
sharing leadership.
• A partnership is an expensive way to secure the benefits
described above.

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Torpedo Avoidance!

The math is interesting related to cost/benefit of a

partnership. In effect, a partnership “costs” something like
50% of the equity of your business. This cost is permanent.
Let’s say we’ve been running now for five years and our
business is progressing nicely. Each partner is drawing an
attractive salary, and we have $150,000 in profits to
distribute. You receive $75,000 and so does your partner.
By contrast, let’s say our solo business is running
nicely because we hired an excellent, loyal employee as
General Manager. She is loyal partly because you are a
wonderful boss but mainly because she receives 15% of
your profits. In addition, at the end of each 5-year period,
she receives a bonus of 5% of cumulative profits. If we
managed to make the same $150,000 per year, she receives
a $22,500 annual bonus (which sure isn’t bad); you put
back $7,500 for her 5-year bonus; and she receives
something around $40,000 at the end of the 5 year period.
Note that you have given her a total of $30,000 from annual
profits. You keep $120,000 rather than $75,000.
Now it’s time to sell our business. If we can sell at
five times earnings, our business is worth something like
$750,000. 50-50 partners receive $375,000 each. Solos
receive 100%.
If an employee fails to perform or turns out to be
extremely incompatible with your style, you can release the
employee with relatively little difficulty. Releasing a
partner is obviously another matter.

Those in truly successful partnerships have their

own numbers analysis:

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 Partner Problems

1 plus 1 may = 3. Two (or more) partners who

bring powerful motivation, excellent skills and compatible
styles will likely outperform one entrepreneur and his
employee. If the partnership earns three times as much as
the solo operation, we make plenty of money and enjoy the
benefits of a sound partnership.
The benefits of a sound partnership may be
worth the cost. Half of $150,000 or half of $750,000 may
be fine if the partnership brought more leisure time, more
peace of mind, or the other benefits described above.
Another lure of the partnership may be financial. If
your start-up idea needs $100,000 and you can only raise
$50,000, you may be tempted to discuss the possibility that
your ol’ buddy Jack comes into the business with you. In
my opinion, based on watching partnerships flame and
burn, this is the worst of possible reasons to enter a
working partnership. Jack has basically bought a lifetime
job in your enterprise. Getting him out will be like blasting
granite with dynamite. He has a huge expectation of
financial reward and will likely hold that hatchet over your
head if things aren’t going well. I might be persuaded that
50-50 with Jack is better than never starting at all, but it
would be a close call unless he assuredly brings the
attributes of a good partner we’ve already discussed.
If your start-up needs additional cash, it is likely
best to view the issue of money as different from the issue
of hiring talent. If Jack will invest $50,000 on an acceptable
basis and become a silent (as opposed to working) partner,
that might make sense. Wealthy investors and venture
capitalists are sources of funding that, as a practical matter,

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Torpedo Avoidance!

involve silent partners (although they tend not to remain

silent for long if you aren’t producing results).
One final thought as we move from business
partnerships to personal relationships: in many respects, the
pressure on a partnership relationship is similar to the
pressure on a marriage:
• It is non-stop, every day (in fact, many business
partners see far more of each other than they see of
their spouses).
• It will hopefully involve some highs, but it will also
involve some real lows.
• Personal traits that are annoying become increasingly
annoying as the years pass.
• There is constant negotiation over who will do various
chores and when.
• If one partner is ill, a variety of new pressures fall on
the other.
• Outside pressure from the partner’s family can
negatively impact the relationship.

Actually, this list could go on and on. The pressures

on the relationship can be intense. Yet partners have not
stood before God and these witnesses to pledge eternal
loyalty and they probably don’t take “relationship
medicine” such as vacationing together or worshiping
together. Unless you are absolutely convinced you are
compatible with a partner, it is highly risky to enter the
relationship.

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 Partner Problems

Personal Relationship Pressure

Business ownership involves at least four sources of
pressure on marital or other personal relationships:
• Day-to-day demands of the business
• Differences in long-term goal structure
• Crisis if the business flounders
• All of the above and more if husband/wife or
significant others work together in the business

Day-to-Day Demands: A business, especially in its

start-up phase, can be very demanding of time, energy and
mental concentration. The partner will likely feel a variety
of resentments and jealousies. It is certainly true that any
job situation can involve pressures such as the 60-hour
workweek. But the entrepreneurial experience magnifies
the demands simply because we are far more emotionally
involved in our own business than we were at Universal
Amalgamated Conglomerate, Inc.
It is imperative that a couple is emotionally
prepared for their respective roles in the business. There
must be immense patience, kindness, understanding,
forgiveness and love to make it all work. This book has
actively aimed at gender equality. This topic represents an
excellent example of the need for such equality. Our
economy has certainly moved toward a “two working
parents” reality. It is increasingly common that husband or
wife (sometimes both) own a business rather than simply
work in one.
Thirty years ago, we would have stressed the need
for wives to be supportive of their husbands. Today the
opposite is just as likely, and just as important.

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Torpedo Avoidance!

Differences in Long Term Goal Structure: We

can draw on the author’s first-hand experience to illustrate
this point. After riding clear down the tube with me in
Concepts 4, Inc., my wife Janet agreed to support another
try. Money was very tight, and shortly after our restart-up, I
entered the printing business. Printing is a cash-hungry
industry. Growth requires continuing investment in
equipment not to mention considerable cash tied up in
inventory and receivables. On perhaps twenty-six occasions
during the early years, I said, “OK, Janet, all we need to be
really competitive is a ________ (the latest machine I was
lusting after). After that we’ll have plenty of money for
vacations or furniture or….”
After maybe the fifteenth time I used this ploy, it
became a family joke. And, fortunately for me, the family
was supportive of the business’s demands for cash. But this
kind of potential conflict plays out constantly. Other
examples:
A driven entrepreneur has earned far more than his
spouse ever dreamed of or even cares about. She says,
“Honey, slow down so we can enjoy this.” He wants to
double the fortune while he’s on a roll.
A couple promised each other that traveling the
country in their Winnebago was the reward for all the
effort. He’s ready to travel. She can’t stand the thought of
not being at her desk building her empire.
A couple agreed that he would leave his secure but
low-paying job to improve the family’s fortunes. He
reluctantly opens a business, but turns out to be such a
timid businessman that the entrepreneurial venture has no

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chance of meaningful success. He increasingly resents

family pressure for him to be more successful.

Crisis: Businesses face crisis from time to time.

Some entrepreneurs respond to this kind of pressure with
unpleasant emotions such as anger, moodiness or worse.
Others respond by an even more intense investment of
time, energy and focus. Either reaction can be very difficult
within personal relationships.
During times of legitimate crisis, the entrepreneur
must invest the effort necessary to save the ship. If loved
ones are not supportive, something has to give.
But entrepreneurs have a tendency to manufacture
crisis. A growing business will have multiple fires burning;
and it will always be thus. If the E allows crisis to become a
permanent mentality, loved ones are unfairly short-
changed.
Failure: The ultimate collision of entrepreneurial
and family goals is failure. In our chapter on Ego, we
discussed the possibility that a business could fail and the
importance of a personal emotional structure that can
absorb the failure and bounce back. In every sense, this
issue involves family. Let’s again use the Corbin example.
Janet had married me with some feeling that I would do my
part to help support the family in the manner to which we
planned to become accustomed. I had asked for Janet’s
hand in marriage with assurances to her parents that she
would be in good hands with Corbin.
Within four years of our wedding day, we were
doing great, driving a Lincoln to our nice home in the

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suburbs. Within two more years, we were flat broke,

driving an elderly Buick to our rented apartment.
Our friends and family lived through the collapse
with us. Janet’s bridge club and our other social circles
were well aware of the situation. There was absolutely no
place to hide the truth. We had failed. The once high-flying
Corbin business reputation was lying upside down with
flames still smoldering.
There is no need to belabor the obvious. Both
husband and wife must be willing to say we are willing to
risk failure; we can handle the social fallout of failure; we
can deal with the loss of possessions, trips and other
lifestyle perks; we know our marriage can survive the
pressure from a failure. Otherwise, it may be better not to
start.

Husband & Wife (or Significant Other) Working

Together: Some couples work well together. Others are
disasters. These are the key challenges:
It must be quickly decided whether husband and
wife are co-equal partners, meaning the business has two
bosses. If this is the case, employees are likely confused
about who is in charge.
If it is decided that Spouse #1 will be president,
then Spouse #2 must be an employee working somewhere
in the enterprise. Spouse #2 will likely be a difficult
employee for Spouse #1 to manage, especially if there is
any baggage brought from home.
Roles in the business may need to be different from
roles at home. If she is the president and he is the sales

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manager, but he is a nagging, opinionated husband given to

harsh criticism at home, he will either:
—set a horrible example for other employees in
the business by nagging there
—realize the need to modify behavior to fit new
roles
—get fired.

Fellow employees tend to find this arrangement

difficult. They aren’t sure whether to communicate with the
couple as two individuals or as one. They will usually make
a “pillow-talk” assumption that may block crucial
communication to Spouse #2. At best, employees will
assume that Spouse #2 enjoys a favored situation and there
may be resentment.
The possibility of E-children being introduced to
the business involves many of the same issues. The
entrepreneur has every right to say, “I built the field and
brought the balls and bats. I’ll put anyone on the team I
want to.” But there should be realistic appraisal of the
impact on employees and the business in general. Many
children find it very difficult to work in the family
business, so issues of goals, roles and feelings must be
carefully worked out.
Of course, the summary issue is simply this:
Modern life puts great pressure on couples and families. If
we add the pressure of an entrepreneurial venture, there is a
possibility that it is simply too much. The decision to
start—which carries with it the commitment to hang in
there through the tough times—must be carefully made
with complete family involvement.

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To Ponder and Discuss

1. What is your basic philosophy regarding partnership vs. going

solo? Why?

2. Do you have the personal qualities to be a solid partner for

someone else?

3. Have you carefully sought commitment and emotional support

for your entrepreneurial effort from your loved ones? Are they
prepared to support you “in plenty and in want”?

4. If you are in a form of partnership, have you developed a buy-

sell agreement and a plan for compensation that will adjust for
changing roles through time?

5. What is your attitude toward bringing children into the

business? Will they be treated as “just another employee” or as
automatic members of management? Have you thought through
the impact on other employees?

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 Chapter 8

Dishonesty, Greed, Sloth

We will not dwell here, but this book would be less

than honest if we do not frankly discuss some of the
unsavory qualities entrepreneurs can bring to their
businesses.

Dishonesty
CASE #24: Jake owned a small manufacturing
company providing component parts for the appliance
industry. As owner, Jake dealt at every level of the
operation: major customer account contact, manufacturing
and administration. Most people who knew Jake didn’t feel
he meant to be dishonest; however, he strongly disliked
confrontation, whether with customers or employees. He
was prone to say the things that smoothed situations over.
With customers, he was likely to downplay quality
problems and to make delivery promises that were often
unrealistic. With employees, he soothed unhappiness with
somewhat vague promises of future promotions or pay
increases.
As time passed, nearly everyone had an example of
“Shady Jakeisms.” Although the business initially ran
reasonably well, Jake’s reputation grew shakier.
The business hit an economic downtown, and
problems became much tougher. Sales were off. Margins
were squeezed. Fearful of losing the business altogether,

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Jake tried to reduce all possible expenditures. Unable to

afford salary increases but fearful of losing his key people,
Jake made lavish promises of bonuses and increases when
times got better.
The business survived the crisis, and employee
expectations for improved compensation were very high.
Jake had made no notes regarding his various promises.
Worse, although the business had weathered the crisis,
Jake knew he could not afford a major round of wage
increases. He stalled one employee after another. Morale
plummeted and most of Jake’s key people left the business.

It might be harsh to call Jake out-and-out dishonest.

He is a decent person who means well. He does not mean
to deceive people in the way con artists dishonestly plunder
pockets. Slippery might be a better description for Jake than
dishonest. However, over the long-pull, Jake’s management
style left a trail of people who distrusted him, eventually
undermining his reputation and his business.

CASE #25: The ABC Dairy purchased farmers’

milk, bottling some for retail and turning some into powder
for use in the military. These government contracts
represented over 50% of sales volume. The dairy
purchased milk in two grades: premium grade A and grade
C. The military application called for grade A milk;
however, during a difficult business cycle, ABC’s owner
decided to reduce costs by making powdered milk from
25% grade C and 75% grade A milk. This practice
continued for two years but was eventually exposed when a
disgruntled employee notified government inspectors who

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set an inspection trap into which ABC fell headlong. The

dairy closed amid a flurry of legal action, some of which
involved criminal charges.

Virtually every business opportunity brings with it

some opportunity to “profit” through cheating. Customer
invoices can be padded. Delivered quality or quantity can
be below specs. Revenue can be hidden from the taxman.
Personal expenses can be charged to the business (etc. etc.).
Every entrepreneur makes a personal choice in regard to
the ethics that will guide the business.
Obviously, a powerful moral argument can be made
against dishonesty. The collapse of ABC Dairy presents a
more practical argument: you can lose your customers, lose
your business, and go to jail.
The autopsy of ABC Dairy revealed another
drawback to dishonesty within an enterprise. Through time,
it became well known to ABC’s employees that “the boss
was cheating.” Leaping at the clear message that cheating is
OK, ABC employees became involved in a variety of
dishonest practices. There was widespread pilferage of
company inventory. Employees were cheating on their time
clocks, “punching each other in and out” for hours not
worked at all. ABC’s managers also felt it was OK to get a
piece of the action. For example, one was “misdirecting”
inventory to a small grocery store owned by members of
his family. In short, dishonesty at the leadership level led to
thorough corruption throughout the business.

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Greed
Greedy business owners sometimes resort to blatant
dishonesty, but greed can do its damage without out-and-
out dishonest business practices.

CASE #26: Jan opened her own construction

business with the clearly stated goal of “getting rich.” She
set high growth goals and worked hard to achieve them. To
accelerate her growth, she borrowed extensively, leading to
a debt-heavy balance sheet. As her business grew, Jan
began withdrawing profits aggressively to fund the lifestyle
she craved. She was prominent in her social set. She soon
owned an expensive boat, sports car and mountain condo.
The business hit a major economic downturn and
failed quickly. Jan simply did not have adequate revenues
and cash flow to meet overhead and debt service.

Most entrepreneurs face Jan’s dilemma, at least to

some extent. Financial success is likely to be one of our
motivating goals. We risk much, work much, and sacrifice
often. It is extremely tempting to begin cashing in as soon
as possible. As we’ll discuss in Chapter Eleven, a sound
growth plan includes provision for future investment and
for surviving downturns. Jan’s boat, sports car and condo
turned out to be the wrong place for her cash when times
got tough.

Greed can negatively impact business relations with

employees, customers or vendors:

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 Dishonesty, Greed, Sloth

Employees: Some business owners view employee

wages and benefits as expenses to be minimized so that
profits can be maximized. This mentality leads to the kind
of adversarial relationship that has played out as labor-
management disputes through much of business history.
More enlightened companies view employees as important
team players. Employees at every level are included in
decision-making processes, and compensation plans
include provision for employee participation in the profits
of the business. In today’s job market, it is extremely
important, and very difficult, to develop a solid, loyal
employee team. E-greed can definitely conflict with sound
team development.
Customers: Chapter 6 discusses Poor Customer
Relations. An owner fixated on short-term profit will tend
to avoid the investments in customer service that lead to
long-term business relationships. These investments can
include refunds or price adjustments, job rework, or “after-
the-sale” service greater than anticipated. I ran across two
example comments from employees in small businesses:
“We couldn’t believe it. Eight years ago, our owner
got into an argument with a customer over a $35 invoice.
The customer was so angry, she stormed out and never
came back. We checked our records and found she bought
an average of $8,000 from us every year. So we lost
$64,000 over a $35 invoice.”
“Our company is amazing. We spend tens of
thousands of dollars in advertising to get people into our
door, and then beat them over the head with all kinds of
negative, restrictive policies once they’re here.”

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Vendors: Most businesses rely on vendors to

provide the materials or services necessary to operate. A
remarkable number of business owners view their vendor
relationships as adversarial. Again, greed can be a key
motivator. Every effort is made to beat the vendor down in
price, or “up” in terms of services provided. Beating up
vendors may add to short-term profitability, but for many
Es it is long-term stupid. Solid vendor relationships can add
an important element of infrastructure. Among the benefits:
• Technological and operational savvy
• Help in meeting deadline crises
• Help in cash-flow crises by temporarily easing payment
terms
In my personal experience, business is more
pleasant and long-term success is more likely if employees,
customers and vendors are viewed as important members of
the team.

Sloth: Sloppy Operation

CASE #27: Sam launched an import-export
business that included various wholesale functions and a
local retail shop. Everyone who knew Sam felt he would be
a huge success. He knew world markets. He was fluent in
several languages. He was a creative, dynamic, sales-
oriented, take-charge kind of guy who could really get
things done.
The business grew dramatically from the day it
opened. Sam was truly in high gear, jetting around the
world to make various contacts and deals.
On the operational side, things weren’t so positive.
By his own admission, Sam was a “big picture guy” who

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didn’t care much about operating details. He had hired a

business manager proficient in accounting, but the business
was soon in a world of trouble. The business manager had
no grasp of the complexities of international commerce.
Suppliers often shipped late. Sometimes they shipped the
wrong merchandise to the wrong locations. Quality control
systems were nonexistent, and a great deal of shoddy
merchandise was being delivered. The business collapsed
from a cash-flow hemorrhage when several large
customers refused to pay for faulty merchandise.

Sam’s problem is played out in businesses of every

size. Many entrepreneurs are creative, messy-desk types
who love juggling many balls. But there is an immense
danger that the operational side of the business will reflect
the style of the founder and become messy. For owners
such as Sam, it is often critical that an operations manager
be hired who will enforce discipline on the operation. Sam
must find a manager, let’s call her Carolyn, who
• Understands the entire business well enough to
establish operating procedures and controls at every
level
• Is a compulsive detail-oriented person who winces
when she notices an “i” dotted slightly off-center
Sam must preach, and mean it: “Do as Carolyn
says, not as I do.” Eventually, if Carolyn is really good,
she’ll even pound Sam into personal compliance with the
company’s purchase order system and other procedures.
Even very small start-ups can be ruined by sloppy
procedures and quality control. If a full-time Carolyn is not
affordable, part-timers or “temps” should be considered.

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Torpedo Avoidance!

Many cities have programs in which retired executives are

available to small business owners. The design of your
control procedures is an excellent utilization of retired
veterans of business administration and finance.

Quality Control!
The issue of quality control perplexes many small
businesses. Large corporations have entire departments
devoted to quality control. Some small businesses skip
formal quality control altogether, assuming “we can’t
afford to have people just standing around checking
things.” In fact, quality control is a vital, ongoing function
of every successful business. It starts with analysis from the
viewpoint of the customer:
• What can cause the customer to be dissatisfied?
—Product quality
—Delivered quantity
—Deadline misses
—Billing errors
—Other administrative snafus
—Inconvenience in doing business
—Other
• Do we have internal procedures that assure that the
customer will be served well?
—Well thought-out procedures
—Clear communication and adequate training
—Necessary hardware/software
If not, we must design necessary systems and
procedures.
• If our procedures are in place but we fail to deliver
customer satisfaction, what caused the problem?

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—Inadequately trained employees

—Unmotivated employees
—Inadequate staff vs. customer demand levels
—Confusing procedures
—Poor internal communication of customer needs
(order entry)
—Poor internal coordination among people or
departments
—Inadequate monitoring of performance

By pinpointing the specific reasons for problems, it

is almost always possible to design improved systems and
procedures. Some quality control procedures may be very
complex. Others can be as simple as giving all employees
increased incentive to care about improved quality, or
holding periodic meetings to discuss specific problems and
the steps necessary to assure no repeat of that problem.
Quality control is a key topic of book #3,
Entrepreneurial Leadership: Fundamentals.

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To Ponder and Discuss

1. Why is dishonesty a danger within a company’s culture?

2. Have you developed a plan that balances money needed in the

business and money you desire to withdraw for personal
reasons?

3. Why is there often major conflict between entrepreneurial

thinking and administrative discipline?

4. What steps are you taking to assure administrative discipline

within the business?

5. Do you have an active quality assurance system in place? If

not, does it make sense that “quality control is a company-wide
activity” that requires both procedures and discipline?

6. What is your attitude toward vendors: as partners or suppliers

to be pitted against one another competitively?

7. A tough one: Where do you personally stand regarding adding

to the bottom line via slightly unethical practices? If, for
example, a client was overcharged and overpaid a bill by $700,
and there was no chance of discovery, would you keep or return
the $700?

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 Chapter 9

Lack of Toughness

Let’s deal first with the issue of physical toughness.

Obviously running a business is not like running a
marathon or playing fast-break basketball. Without doubt
there are many successful entrepreneurs who have
neglected their pushups and tarried too long at the feedbag.
However, there are a couple toughness issues that should
not be ignored:
Long Hours: At various points on the
entrepreneurial path, your business is likely to demand
something like the 18 hour work days and 90 hour weeks of
song and legend. Long hours require excellent stamina for
3 reasons:
• You must survive personally.
• You must function effectively.
• Fatigue can lead to frayed nerves and uneven
disposition. You must be able to absorb fatigue without
becoming a nightmare for others to work with or live
with.

Illness: Individuals vary widely in their

vulnerability to illness. A person who has (legitimately)
used 15 sick days annually for the past several years is a
dubious candidate for self-employment. New businesses
typically demand full-time attention that a chronically
absent owner cannot give.

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Employee absenteeism is a major problem for

businesses of every size. In many respects, the owner sets
the work ethic that soon permeates an enterprise. A
chronically absent owner will almost certainly have
chronically absent employees.
Note that there can be an important exception to our
rule regarding illness. Those facing prolonged illness or
other physical handicap may find it difficult to hold a
traditional job. This situation can actually be an incentive to
start an appropriate business.
Alcohol/Drugs: Let’s again deal realistically with
an unpleasant subject. Business owners are at risk
regarding potential substance abuse. Some businesses
involve considerable socializing. Almost all businesses
involve considerable stress. Many entrepreneurs find
themselves partying regularly or “having a few to unwind.”
The dangers of excessive consumption are well chronicled;
and some seem particularly applicable to the E:
Abuse interferes with good sleep. This can lead to
a vicious cycle of increased fatigue, increased feeling of
stress and increased need to unwind.
Owning a business often requires full-time
alertness. Besides the obvious demands of the working
day, it is surprisingly likely that you will hear from a
customer or employee during the evening. Abuse is not
consistent with full-time alertness.
Employees will be influenced by the example of
the owner. Alcohol/drug abuse is a major problem in many
categories of business. At best, you are likely to face
constant need to encourage employees toward good
judgment and good habits. At worst, you will face the need

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to discipline and demand rehabilitation as a condition for

continued employment. Problems are obviously
compounded if the business owner is sending a clear signal
of personal excessive use.
If an employee (including the owner) of a
business should be involved in an accident during
business hours, the chances are excellent that the business
will be named in any related litigation. The opposing
attorney will attempt to show that the business fostered an
atmosphere in which drinking (at lunch, for example) was
acceptable. One of the most strongly worded rules in
Corbin enterprise employee manuals is that consumption is
forbidden “between first clock in and last clock out of the
business day.” Violation is one of our grounds for
immediate dismissal.
It would be naive and dishonest to suggest that all
successful entrepreneurs are clear-eyed health nuts who
keep their body fat under 15%. In truth, there are some
successful people shaped like Humpty-Dumpty whose
vision doesn’t clear until at least 10:30 every morning. But
for every person who has succeeded despite physical abuse,
there are surely 10 who have failed because of it. The
people I have observed who are truly happy with
themselves and their entrepreneurial life are under control
physically. They have found a balance that supplements
their work life with physical and spiritual development,
friends, family and leisure.
Mental Toughness: If this book were a classroom
where I am professor, I have sat at my desk for part of the
lecture. I have stood for part of it. I am now standing ON
my desk.

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Torpedo Avoidance!

In my worst nightmare as a prospective

entrepreneur, I did not visualize the extent to which a
business would pound on my emotional
system—demanding mental toughness. Here are some of
the reasons:
Customers can be extremely demanding. In many
businesses, this demand is a daily (or hourly)
bombardment. Confrontations with customers can be
extremely tense.
Employees can be exasperating beyond belief.
Some don’t show up at work; some are not ready to work
when they come to work; some are sloppy and careless;
some are dishonest; some whine and complain constantly;
some gossip constantly; and some sow major discord that
undermines the morale of others. You sometimes feel more
like a counselor or referee than a business owner.
Every business has down-cycles, but these are
particularly stressful for small business owners. Some have
argued that General Motors was in a down-cycle for over
20 years before grasping the need to change its philosophy
of business. GM’s pockets were deep enough to allow
survival until they got their wake-up call. Small businesses
have shallow pockets and down-cycles involve constant
fear for the survival of the business. It is very grueling
mentally.
Another cash-flow reality affects the mind-set of
many entrepreneurs as times get better. There is a powerful
feeling that “I’m doing this for everyone but me.” Payroll
costs increase; benefit costs seem to skyrocket; you are
spending an additional 10% of payroll for “FICA match”
(your dollar-for-dollar match of employee social security

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 Toughness

and Medicare withholdings) plus unemployment taxes;

your worker’s compensation insurance escalates; your
property taxes increase, etc. etc. When you eventually do
make a profit, you find the business’s growth requires you
to reinvest those profits. You are able to withdraw little for
personal use, but the government still takes a sizable chunk
in taxes on your profitability. It is certainly true that all this
may be worth it as your business grows, but there is major
mental strain as you try to find cash to fill all the
outstretched palms.
Through time, you will face several nonrecurring
crises—those events that cause premature graying. Among
those I have faced are
—An unannounced 4-day IRS field audit
—An announced 3-day state sales tax audit
—A fire which caused major smoke damage
—An auto/van accident (our fault) which nearly
killed the woman in the other car
—A trucking incident in which my driver drove our
12’ foot truck under an 11’10” overpass
—Major loss of computer data
—Unexpected machine maintenance in the range of
$50,000 on a single machine
—Unexpected departure of key employees
—Dishonest representations by competitors aimed
at harming our relationship with customers.

Actually, I could probably triple this list, but I’m

getting depressed again just writing about it. The simple
point is this: Owning a business will almost certainly
involve major mental and emotional pressure. Some of it is

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nonstop, ongoing pressure. Some will occur randomly.

Murphy’s Law assures that pressures will not be spaced at
pleasant intervals that allow you to handle them more
easily; rather, they will sometimes pile up unmercifully.
Some entrepreneurs handle it all nicely. Some end up
sitting in the corner of their office flipping their lips with
their forefinger. Some simply say, “This is not worth it. I’m
outta here.”
The relationship between mental toughness and
potential business failure is not as direct as, say, the issue
of a good marketing plan. But, through time, a “pounded
on” entrepreneur can lose qualities such as positive
enthusiasm and objective analysis. Problems won’t be far
behind.
Note: the last few paragraphs were presented
“grimly” because the subject is a serious one. I do not
mean to suggest that E-life is like running a shop of
horrors. There can be great times, great relationships and
great victories. But there will assuredly be some tough
times.

Failure to Confront Tough Reality

Three short case studies will illustrate the
importance of another aspect of toughness:

CASE #28: John operated a commercial printing

business for 12 years. He built an employee team that he
came to view as a close-knit family. In a single year, his
largest account opened an in-house print ship, and 4 other
major accounts were lost for various reasons. Sales
dropped over 35% in just a few months. Payroll costs

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skyrocketed from about 25% of sales volume to over 45%.

John’s temperament and attitude toward his employees
prevented him from implementing layoffs. He tried several
expensive marketing plans to build sales. They were not
successful, and the company closed.

Contrary to stereotype, a surprising number of

entrepreneurs have non-confrontational personalities. They
are anxious to build teams of positive employees. They
tend to avoid negative confrontations. They also shy away
from bitter medicine such as layoffs. John’s example is
surprisingly typical despite the obvious logical flaw.
During my interview with John, a brief exchange captured
the tragedy:

BC: “From my experience, replacing 35% of your

sales volume could take a couple years; so your problem
seemed to be clearly on the cost side, right?”
John: “Obviously that’s right, looking back.”
BC: “So, by failing to deal with your cost side by
laying off maybe 4 people, you lost your company and
everyone lost their jobs?”
John: “That’s true. I know it seems crazy. But I just
couldn’t do it.”

Most entrepreneurs can identify with John’s

emotional dilemma. Besides the possibility of a non-
confrontational temperament, we face two other emotional
issues:
Our employees have bought into our dream.
They are investing their careers in our business. Laying

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them off involves a feeling that we have let them down,

betrayed their trust.
Layoffs are a clear sign that we, as
entrepreneurs, have gone wrong somewhere. Admitting
failure, even temporary failure, is tough.
Yet the right answer in a situation such as John’s is
absolutely clear. In fact, this situation illustrates an irony
that recurs: Decisions that are the hardest to implement
in terms of cost or pain are often the easiest to reach
analytically.
John’s analysis was simple. “I’m in a cost crunch.
No printing company can survive a 45% cost of payroll.
Some people must be let go.” It was the pain of
implementation that sank John’s ship. Of course, by putting
off the pain of laying off 4, he later faced the pain of facing
the 12. Entrepreneurs must learn to quickly identify the
need to make painful decisions and to make and implement
those decisions as swiftly as possible.

CASE #29: Sue launched a travel agency that met

with early success because Sue’s connections allowed her
to network into several large accounts. She hired Marian, a
strong office manager to keep the “inside of the shop”
running while Sue continued to concentrate on sales. Her
office manager was soon deep into every aspect of the
business, from personnel hiring through financial
administration. Within a year, Sue began to hear horror
stories about her office manager’s operating style.
Employee morale was affected by constant personality
clashes and by Marian’s heavy-handed implementation of
procedures. Worse, customers reported that dealing with

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Marian on billing matters was something like dealing with

an IRS auditor. Sue’s instincts told her that Marian had
become a potentially serious problem and that Marian
would never change because her style perfectly reflected
her basic personality. Yet Sue realized that only Marian
had a handle on the complexities of running the business.
Sue did not want to become her own operations manager
and hated the thought of hiring and training a new
manager. She procrastinated until Marian caused three key
employees to quit and form a competitive agency.

Sue’s business came close to failure but was saved

through these steps:
• Sue made the decision to release Marian but, before
firing her, spent about a month learning everything she
could about administrative/technical details.
• Marian was released. She received a larger severance
package than she deserved, but Sue did fire her.
• Sue became her own office manager temporarily,
suffering some downtown in sales volume but
achieving an immediate, dramatic improvement in
company morale.
• Marian’s replacement was hired with more careful
consideration of both skill and personality.

Again, Sue’s decision was easy to reach analytically

but was slowed by the pain of implementation. When these
factors were clear, the decision was clear: Marian is
creating unacceptable problems; Marian is not going to
change.

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Sometimes the bitter medicine is strategic:

CASE #30: Alex ran a hardware store in a small

town. After several years of success, sales started dropping
for a series of reasons: the population of the town was
declining gradually because of plant shutdowns; several
new competitors on the edge of town were attracting
customers; a megastore in the nearest city was also
attracting some customers. Alex’s sales curve declined
gradually until he was below breakeven. He quietly closed
the store.

As we have discussed in other chapters, Es must be

students of trends. In many respects it is less important
where I am today than where I am today vs. where I was a
year ago. As we’ve discussed, trends are powerful, almost
mystical, forces in business. Once in place, they tend to
stay in place. They will be broken only by powerful action.
Alex’s situation was extremely easy to grasp analytically:

First Mate: “Cap’n, there’s a hole in the boat. We’re

taking water.”
Captain: “No problem, I’ve got the whole crew
baling water.”
First Mate: “But Cap’n, they’re baling about 500
buckets a minute and I figger we’re takin’ on about 1,000 a
minute.”
Captain: “That’s a problem.”

Alex was paralyzed by the strategic difficulty of

implementing a change. He owned a nice little store. He

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 Toughness

didn’t know much about businesses other than hardware, so

he didn’t want to diversify. He didn’t like the idea of trying
to open another store in another market. But, without
action, he was clearly doomed.
Of course, an orderly exit from the business is a
strategic option. But an entrepreneur who wishes to stay in
business must do the things necessary to counter negative
trends.
Let’s end this somewhat gloomy chapter on a high
note. It is possible to positively deal with many of the
negatives here. Good customer policies can build positive
relationships and provide clear guidance for dealing with
negative ones. You can develop an excellent employee
team with the right hiring practices, encouragements,
policies and procedures. This employee team can relieve a
great deal of the day-to-day stress of business ownership.
And you can build a business profitable enough to feed the
bank, the taxman, the overhead and still have plenty left
over for yourself. These things are possible. To get there,
though, you’ve likely got to be tough.

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To Ponder and Discuss

1. Are you prepared physically for the rigors of your

entrepreneurial life?

2. Are you mentally tough in general? If not, what steps will you
take to improve toughness as you build a business?

3. Are you non-confrontational by nature? If so, what steps will

you take to compensate for this trait when facing tough issues?

4. Do you feel comfortable with making and implementing tough

decisions? If not, how will you improve in this area?

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 Chapter 10

Inadequate Information/
Financial Control

In Chapter One, we talked about the four legs of the

entrepreneurial table: Idea, Implementation, Marketing and
Infrastructure. This chapter and the next address several
issues of our fourth leg: effectively operating and growing
the business.
Management information should tell us what’s
going on inside and outside the operation:

• Inside: How are we doing in terms of sales levels, cost

control, quality control, problem solving, profit trends
and the host of other factors that are barometers of
progress?
• Outside: What is going on in the world outside our
walls—things like economic trends, fashion trends,
technology changes, competitive activity and labor
market factors?

Let’s look outside first. A surprising number of

business horror stories include ignorance of, or the ignoring
of, powerful external forces. In the 1950s, Ford introduced
an expensive, chrome-laden monster car into the middle of
a deep recession. The Edsel, other than providing excellent
material for stand-up comics, was a disaster. A few years

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later, just before Iacocca, Chrysler had evolved a complete

line-up of gas-guzzling moose cars while the rest of the
world thirsted for small economy models. In the small
business world, there are companies that snooze through
the market or technological changes that eventually destroy
them.

CASE #31: Martin owned a “pre-press house” that

provided various services to high-end commercial printers.
He had invested several million dollars in sophisticated
scanners and film output devices. In a period of less than
ten years, most of his service base could be handled on
much less expensive devices easily within the budgets of his
former client base. His business plummeted and was
eventually sold at a deep discount.

CASE #32: Sally owned a travel agency that

specialized in finding discount rates. Her business was
virtually eliminated by the advent of .com services that
provided the same basic service on the Internet.

CASE #33: Mark owned a video production studio

that provided high-end services at premium prices. His
investment was extremely high. In a few years, low-cost
high-powered computers were handling much of the work.
Competitors could provide much lower prices for many of
Mark’s services, and he was unable to compete.

CASE #34: A long-feared plant closing in his town

occurred just after Jason had expanded and remodeled his
hardware store. The entire town’s economy was affected,

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 Info & Control

particularly Jason who had stretched his resources to

expand.

CASE #35: Fred operated a traditional men’s

clothing store that fell on hard times during the leisure suit
era of the 1980s. Fred made a dramatic shift in the
direction of informal wear. The leisure fad was short, and
Fred was again badly positioned. His various missteps led
to customer defection to his competitors.

The moral of these stories is clear. Entrepreneurs

must be dedicated students of their industry and their
marketplace. We must understand important trends and be
prepared to act or react. We must be savvy enough to sift
through the short-term developments that might seem
important but will fade with time. We also must be strong
enough to ride out the short-term bumps that inevitably
come along.

Inside information is the critical set of need-to-

know” information that measures company performance.
For some businesses, it is adequate to pull together a
periodic financial statement and analyze it carefully. For
others, the critical information can be very detailed.

CASE #36: Stan ran a small manufacturing

company. He had managed the company personally for
several years, but growth required him to be on the road
frequently working with customers. Stan set up managers
for his sales, production and accounting departments. The
business had done well in 1996, but profit declined

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substantially in 1997 and was non-existent in 1998. Sales

were steady, so Stan knew the problem was in production,
but he couldn’t figure out the cause. His manager assured
him nothing was out of the ordinary; maybe the cost of
goods was up some, but things seemed just fine. As his
finances deteriorated, Stan brought in a consultant who
was able to find the root cause of the problem: a serious
deterioration in quality control had caused a sizable
increase in spoilage and production re-dos. Stan’s
production manager was able to hide the problem
because the information system did not specifically flag
it, and Stan was too busy to observe first hand.

CASE #37: An air conditioning service business

was struggling with profitability for several years. It was
finally learned that a trusted bookkeeper had pilfered a
huge amount of money from the company. Because the
bookkeeper had been trusted, the company had established
no audit routines that would uncover this kind of
dishonesty.

These two cases illustrate different but important

points:
Your Key Statistics: There is a set of performance
numbers that can measure how well your business is
operating. The set of numbers varies by business. It may
include a large number of measurements or just a few. But
whatever the set that measures your business, it should be
carefully tracked and recorded. This discipline makes
possible the trend analysis that is crucial for business
analysis. Some of the possible statistics:

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 Info & Control

Sales this month vs. sales for the same month in

previous years: A simple spreadsheet can be established
with “Year” at the top and “Month” down the side, and the
trend analysis can begin. It may be sufficient to track total
company sales. Often, though, it is important to track
smaller sales categories—i.e., sales for individual product
categories, separate retail locations, etc. Sales by other time
periods may be important. “Year-to-date” is a typical
comparison. Some businesses track activity by week, day
or even hour.
Key costs as a percentage of sales: In the printing
business, for example, a key performance yardstick is the
percentage of sales represented by paper. This statistic can
flag upward price pressure not being matched by price
increases. It can also indicate problems with waste and
spoilage or a significant shift in the mix of work. In many
businesses, labor as percentage of sales is key.
Marketing cost/effectiveness: An obviously
relevant statistic is marketing cost as a percentage of sales.
In many businesses it is also important to track the specific
results of specific marketing campaigns. It is extremely
common for entrepreneurs to spend excessive money on
marketing before realizing the results don’t justify the
expense.
Production efficiency: There are many measures of
the productivity of employees and/or equipment. For
example, billable hours vs. total hours on the time clock, or
payroll costs as a percentage of revenue generated by that
payroll cost. As with many statistical measures, these
numbers can be difficult to develop. Methods range from
sophisticated computer programs that log actual time vs.

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projects to manual time records completed by each

employee.
Waste/Spoilage: The issue of wasted material (or
time) is central to the failure of many companies. Again,
securing good numbers is not easy because the employees
involved are not anxious for unpleasant truth to be
uncovered, but it is crucial to know the amount of—and
trend of—waste.
Customer satisfaction: Many companies establish
a formal “complaint log,” partly to measure the number of
complaints and partly to keep track of the kinds of
complaint, whether quality, customer service, price or other
issues.
We’ve talked before of the importance of trend
analysis. The whole subject of performance evaluation
illustrates the key role of trends. If we had eight customer
service complaints last month, is that too much, about right,
or what? If there were twelve the previous month, we’re
improving. Let’s keep the momentum going. If there were
four the previous month, we're slipping. What is
happening? Let's get it fixed quickly! Waste is 3% of sales.
Good? Bad? Again, trends are the key.
Internal Audits and Control: The possibility of
dishonesty by either employees or customers is a tough
entrepreneurial issue. Some respond with high paranoia,
almost literally issuing one pencil at a time and monitoring
use of that pencil. Others ignore the topic totally. The right
position is obviously somewhere in between. It is important
to think about business controls and procedures asking
questions such as these: Could a dishonest person steal
money or material from the company? Would the control

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 Info & Control

system discover the missing money or material? Might

employees “moonlight” using company resources?
It is sad but true that very good people can do very
dishonest things. There can be major financial problems at
home, an addiction, or any number of reasons for dishonest
behavior. Entrepreneurs tend to be (and need to be) positive
types who look for the bright side of things. But it is simply
good business to establish the kind of controls and audits
that discover dishonesty.
Audits and “dishonesty protection” are part of the
whole issue of a sound administrative system. Companies
that build solid infrastructures that smoothly track costs,
develop invoices, track receivables and the myriad other
functions of business operation are creating the foundation
for growth and success. Those that don’t are almost literally
building on a sand foundation. More on this in Chapter
Eleven.

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To Ponder and Discuss

1. What are the key trends outside your business walls that affect
your future? What methods do you use to track and record key
information?

2. What are your key inside performance yardsticks? Do you

have formal systems of tracking performance?

3. Is the information you receive objective, or can it be

influenced or altered by employees who have a vested interest in
the data?

4. Do you have audits or other precautions against dishonest

employees or vendors?

5. Is your administrative system well defined, and is it operating

smoothly? If not, what are repetitive problem areas? What can
you do to address these problems?

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 Chapter 11

Inadequate Foundation for Growth

This chapter includes one of the genuine tragedies

of the entrepreneurial experience. We’ve done it! Our idea
was sound. Our early marketing efforts worked. Customers
are flocking to our new business. We are growing rapidly!
We are successful!
But the growth we dreamed about becomes our
worst enemy. We weren’t ready. The wheels begin
wobbling then falling off our wagon. And it all comes
apart.
This scenario is all too common, and it tends to
blindside first-time entrepreneurs. Part of the reason is
focus: working so hard at proving the idea and getting
things off the ground that we don’t prepare for phase two
and three. Part of the reason is that, unless you’ve
experienced it, it just doesn’t make sense that rapid
business growth can be a cause of failure.
Here are some of the potential reasons:
Cash Flow: Many growing businesses are major
cash-hogs. Here is a simple example:

CASE #38: John and Phyllis have developed an

excellent gift product sold through specialty retailers. The
business was very successful in their home city based on
John’s visiting retailers and Phyllis’s taking care of
production at their small plant. Customer acceptance was

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so strong they were convinced that regional if not national

distribution was possible. They had some money in the
bank and a $50,000 line of credit, so they felt ready to go.
They began serving all significant cities within 200 miles of
their headquarters. Acceptance was good, and they nearly
went broke.

Here are the reasons that “success” nearly killed

the business:
It was impossible for John to personally sell in
every city. Three sales people were added at a monthly cost
of $2,000 plus expenses and commissions. It was quickly
learned that a new sales person, if successful at all, has a
90-day learning curve to know the products and the
territory and to get things going.
Increased demand required a substantial increase
in inventory levels. Some of the material involved in their
gift came from overseas. Because of long lead-times, it was
necessary to have a large inventory on hand. The overseas
vendors also required cash up front.
Four new production workers were added.
Customers were paying their invoices in an average
of 50 days; so there was no significant revenue stream from
a new city for nearly two months after the three months
required for the sales team to penetrate the market.

John and Phyllis raced through their cash reserves

and saved the business by a combination of an outside
investor and additional bank financing. Note two things:
The issues that affected cash, with the possible
exception of the long salesperson learning curve, were

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 Growth Plan

projectable. Even modestly effective spreadsheet analysis

would have indicated that growth was going to demand
additional cash.
As we’ve discussed, bankers and investors are much
more positive if you discuss growth-related cash needs
before they become pressing. When John and Phyllis first
approached potential financiers, they appeared frightened
and confused by the cash crunch they faced, so found it
much more difficult to negotiate favorably. Those who
invest in growth want to be confident that the entrepreneur
understands how to manage growth.
Growing businesses can gobble cash in many ways.
Among them:
—Increased inventory
—Increased receivable balances
—Additional equipment expense with attendant
costs such as maintenance and utilities
—Personnel hiring and training
—Overtime premiums necessary to meet demand
—Fronted costs such as site development, licenses,
legal fees, etc.
Careful financial projection is the key. It’s usually
wise to factor in a bit of Murphy’s Law as well, recalling
again the painful prediction that new projects take twice as
long and cost twice as much as expected.

Infrastructure: Infrastructure is the support system

that allows a business to run smoothly. It includes issues
related to hiring, training, payroll (and other HR functions),
purchasing, controlling inventory, invoicing, collecting,
paying invoices, and remitting taxes. Many early-stage

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entrepreneurs personally handle a large percentage of these

functions. Growth often requires a double adjustment:
• More formalized, more professional procedures
• Delegation of various functions to staff. If the staff is
not yet in place, the challenge grows greater, involving
finding, hiring and training people trustworthy to
handle key functions in the business.

CASE #39: Ned’s business manufactures products

for the leisure industry. Ned is an aggressive entrepreneur
and a skilled ball juggler. His style is rapid-fire and
brusque. He relies heavily on an excellent memory, and it
was not unusual for him to walk through the plant
shouting: “Mary, do we need to stock up on polymer
sheets?” “Jack, don’t forget to get me those samples for
Acme today.” “Jesse, did we get the check from
Consolidated yet? No? I’ll follow up right away.” Then, in
most cases, Ned returned to his office and followed up.
Thanks to sales contacts initiated by Ned, the
company landed a Fortune 500 retail account that agreed
to carry part of the product line. The new account, by itself,
increased sales volume by 35%. Ned quickly learned that
humans share at least one trait with computers. If the task
is too big, there can be memory overload. The company
was suddenly hiring and training as well as beefing up all
aspects of production. Ned’s to-do list was immense, and it
simply overwhelmed him. He did not have formal
procedures nor staff support ready to step in. It was quickly
obvious to the new major account that Ned’s company was
not prepared to serve them.

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 Growth Plan

Understanding and building solid infrastructure is

vital to building for the future. Often the key issue is
administrative systems. For example, a cash-oriented
single-location business under the watchful eye of the
entrepreneur has one kind of cash-control requirement. As
soon as the business moves to multiple locations, the
administrative system becomes vastly more complex. The
same basic issue applies to monitoring employee
performance and assuring uniform quality control.
Growing businesses must develop sound operating
policies and procedures. These “P&Ps” need to be carefully
documented. Employees need to be trained. New
employees need to be brought up to speed quickly. Many
entrepreneurs are not procedure oriented and tend to
postpone this process. A rapid growth spurt can throw the
company into chaos and confusion if procedures are not in
place. Similarly, if policies aimed at internal discipline are
not in place, the result can be disaster as illustrated in
CASE #40:

CASE #40: Sue and Bob developed a restaurant

concept that worked extremely well in their medium-sized
city. They targeted similar cities and opened three
restaurants in a relatively short period. Reception was
good in the marketplace. About two months after opening
in their third city, they were slapped with a sexual
harassment lawsuit. It was quickly apparent that the
company had failed completely to develop policies and to
aggressively train employees. The suit was a near-
catastrophic drain of time, energy and money.

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Choking on the Fruits of Success: Financial

success can easily distract the entrepreneur.

CASE #41: Stacy built an extremely successful

electronics distribution business, including excellent
response to the emerging world of computers and the
Internet. His story was widely publicized. He won various
entrepreneurial awards. In addition to adding the trappings
of success—like cars, a boat and a lakefront home—Stacy
became a featured speaker at many events and was soon
serving on the board of two companies and a major
nonprofit organization. Distraction from the core business
first led to employee morale problems followed by customer
disenchantment. Now addicted to his new fame, Stacy
attempted to patch problems in the business by hiring a
CEO rather than returning personally to day-to-day
operations. The business floundered badly.
The moral of this story is clear, but easily ignored.
Hard-working entrepreneurs have an understandable desire
to enjoy the fruits of their efforts. But too much money or
time withdrawn too soon can cripple or kill the business,
especially during its growth phases.

Inadequate Retreat Plan: Let’s close our “growth”

chapter with its first cousin, the possibility that we may
need to fall back and regroup. The reasons can be several,
for example:
• Economic downturn
• Fashion downturn
• A competitor temporarily grabs market share
• Part of our grand plan turns out not to be so grand

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 Growth Plan

CASE #42: Sharon owned a small restaurant that

had built a significant carryout business. She decided that
carryout was reasonably close to catering and decided to
expand by opening a catering operation. She purchased an
equipped van and added to her kitchen and staff, then
launched an aggressive ad campaign.
The expansion stretched her financial resources,
and she soon learned a difficult truth about catering vs. her
core restaurant business. The catering business was
extremely volatile. Sometimes she was so busy that she
needed extra help, which she tried to handle by a team of
part-timers. During this time, her time and energy were
absorbed to the detriment of the restaurant. But there were
slow times often involving a couple weeks of zero revenue.
It became apparent that the catering business had
been a bad idea, but Sharon had booked several events
months in advance. She was fearful of the negative impact
of canceling those bookings, so decided to struggle on.
Months passed before she finally closed the catering
operation and sold her contracts to a competitor. She was
barely able to save the core business, partly because her
bank was very close to calling her loan.

Entrepreneurs are (and must be) optimistic sorts

who attack the future positively. But every plan needs some
contingency planning. What if things go south? It is
extremely useful to have the basics of a retreat plan in place
because time may be short when the decision to fall back is
made. A very practical application of this concept is
illustrated by Sharon’s difficulty at the bank. Many
business loans carry performance requirements such as a

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minimum amount of working capital or owner’s equity. If

you are plummeting toward those minimums, it is vital to
have an action plan to turn things around quickly.

To Ponder and Discuss

1. Consider the sometimes surprising issue that growth can lead

to cash flow disaster. How does it happen? What is the best
protection against the possibility?

2. How would you describe “infrastructure” as discussed in this

chapter? Why is infrastructure so vital to a growing company?

3. What are key differences when the entrepreneur is “on site” at

a business location vs. having locations run entirely by
employees?

4. What are roles of policy and procedures? Do you have a well-

defined set of P&Ps? Are they well documented and are new
employees trained on a timely, effective basis?

5. What set of corrective steps could you take quickly in the

event of an unexpected downtown in business?

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 Chapter 12

Forces Outside Our Control

The collapse of a business is always a sad moment,

especially for the person sitting in the captain’s chair. If the
collapse results from poor planning or poor execution, we
don’t like the outcome, but we understand it. We can look
in the mirror and say, “Bad job, Bunky, you’ve got to do
better next time.” When the collapse results from external
forces, our egos may be spared, but we are likely to spend
considerable time and energy cursing the fates or maybe
the government.
There are four main categories of forces outside our
control:
1. Acts of God (a term used in its insurance sense and
intending no offense to the Creator!)
2. Acts of Congress (or other governmental bodies)
3. Economic trends
4. Market trends

We will now discuss some ruin and havoc created

by these trends, but note this key point: We are not
necessarily ruined by any of them. They represent risks that
we can assess when we start. They are also risks we can
continually assess as we operate. If the pre-startup risk is
simply too great, we don’t start. If the ongoing risk is too
great, we buy insurance, or diversify, or build a substantial
financial cushion, or make an orderly retreat. We are

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victims of these forces only if we fail to adequately

consider them.

Acts of God
Businesses have been brought down quite literally
by tornado, hurricane, earthquake or fire. The only defenses
are
Prior assessment: If our business concept includes a
grass hut for a building, and we live in California or Miami
or tornado alley, we should probably think of another idea.
Insurance: Adequate insurance can be expensive but
is absolutely crucial if your business is at risk. Coverage
should include property AND business continuation.
Construction and precaution: In my early days, I
shared a commercial building with a company that was
firebombed on a dark Sunday night. Because our landlord
had built a wonderful building with steel roof and stout
firewalls, their business was gutted but ours was spared.
Selection of physical quarters can make a difference.
Proper safety procedures, employee training and
emergency protocols can also help.

Acts of Congress (or other governmental agencies)

Any get-together of entrepreneurs will include
spirited discussion of the correlation between governmental
action and Excedrin consumption. This discussion will
center on two main areas: taxes and regulation.
Taxes: Government routinely turns to business as a
source of revenue. Most businesses pay income taxes at the
federal and state level. There may be various local taxes

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 Forces Outside Control

and fees. Some states impose “gross” taxes (pun probably

relevant) on the gross sales revenue of the business.
Businesses also ante up for social programs.
Unemployment taxes (both state and federal) are paid by
businesses to fund the benefits of displaced workers.
“FICA match” and its cousin Medicare are very stout taxes
that are withheld from employee wages AND matched
dollar for dollar by your business. It is likely that business’s
role in the funding of healthcare services will increase
directly or indirectly.
Because the old saying about death and taxes seems
incontrovertible, we can only be aware, plan them (taxes,
that is) into our cash flow analysis, and pay up. Taxes are
obviously burdensome when times are tough. Particularly
for manufacturing oriented businesses, the combination of
property tax, FICA/Medicare match and unemployment tax
can be crushing in down cycles.
Ironically, taxes are also burdensome on the upside.
As we discussed in our “Growth” chapter, growth takes
cash. Income taxes drain cash that could have been used to
fund expansion of inventory, equipment or employment.
Here is an urgent caution. Do not fail to pay taxes,
particularly deposits of withheld wages, as a means to save
a floundering business. Over my years of observation, too
many acquaintances battled cash flow problems by putting
off tax deposits. The government not only takes a dim view
of this tactic; it holds the entrepreneur personally
responsible for all dollars, penalties and interest forever,
without regard to personal or business bankruptcy.
Regulation: Most entrepreneurs first deal with
regulation when the local fire marshal visits to review the

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location of fire extinguishers, smoke detectors and exit

signs. Through time, particularly for manufacturing
businesses, the visits may come from federal or state
Environmental Protection departments or Occupational
Safety & Health departments. Whole books have been
written on compliance requirements and their various costs.
Horror stories abound of businesses clobbered by harsh
penalties or compliance costs. Here we can only urge
awareness and preparedness. Most industries have trade
associations that can provide various information on
regulations. The government will provide information.
There are many good reasons for entrepreneurs to
“network,” but this is one of the best reasons. Trading war
stories about regulation compliance can forewarn the
unwary.
An example of a still-being-defined regulation
involves job access for handicapped workers. Again, study
and awareness are the best precaution against being
blindsided by an unaffordable penalty or compliance cost.

Economic Trends
After 25+ years of careful observation, I am able to
make this prediction: The economy will sometimes be
excellent, sometimes be horrible, and most times be
somewhere in between. A remarkable number of businesses
are started in good times and collapse in the first ill wind. A
very tiny case study illustrates the point:

CASE #43: Marlene launched Marlene’s Hat Shop

in a small Indiana town. Here wares included hats for men
and women, and caps for kids. Business was good from the

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 Forces Outside Control

start. The national economy “recessed.” The town’s main

industry, connected with the auto industry, recessed. Many
townspeople were laid off. People quit buying hats.
Marlene folded like a tent.

At the strategy level, Marlene made an error typical

of very small businesses. She occasionally read the national
news regarding economic trends, but somehow it seemed
academic, unrelated to a tiny hat shop in a tiny town.
Obviously it was very related. Had Marlene studied some
history—even ten years’ worth—she would have learned
that her town cycled regularly between good times and bad.
She could have then selected from these options:
• Determine that the business could not possibly survive
a downtown, and don’t start.
• Do budget planning and breakeven analysis so the
business can survive at a reduced sales level.
• Stash away dollars during good times to buffer bad
times.
Businesses much larger than Marge’s have been
successful enough to finance boats, cars and trips in boom
times only to be strapped fatally when the economy turns
down.
Depending on the nature of your business, other
economic trends can be anywhere from serious to fatal.
Among them:
Interest rate fluctuations: A heavily leveraged
business can obviously be devastated by a major run-up of
interest rates. Businesses that rely on consumer financing
are also affected.

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Torpedo Avoidance!

Labor pool fluctuations: Occasionally key skills are

in such short supply that labor costs are bid up to
unaffordable levels. Note that this possibility can affect a
range of positions from highly technical jobs to unpleasant
service jobs.
Inflation of key elements of your product cost:
While inflation tends to hit competitors equally, it can
cause prices to reach a level at which customer demand
declines.

Market Trends
Life cycle of concept: Early in the book, we talked
about the poor guy who was convinced that automobiles
were a fad and his buggy whip business was certain to
make a comeback. Market trends will make a mighty
impact on most businesses. The issue tends to be when, not
whether. The fashion industry is aware that this year’s style
may be next year’s Halloween party costume. But
businesses as traditional as printing have seen tremendous
change brought about by emerging technologies such as
quick printing, desktop publishing and “in-house” high-
speed copying. Every entrepreneur must realistically assess
the life cycle of the product or concept and make plans for
the day it begins to fall from grace.
Demographics: The demographics of the country
change, and the demographics of every city, town and
crossroad hamlet change. Businesses that appeal to children
must be certain there will be new children to replace those
that grow up. Businesses that cater to the wealthy must be
aware of the possibility that the stock market will crash or
the clientele will move to new homes in upscale suburbs.

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 Forces Outside Control

New business start-ups must fight the tendency Marlene

exhibited in our case study. Demographic analysis seems
remote and abstract. We tend to be focused on the here and
now as we get started. But, amazingly quickly, five or ten
years will pass. The demographics of the market will
change. We will either be helped or hurt by those changes.
Ongoing analysis is crucial.
Market Upheavals: The simplest example of an
upheaval is the departure of a key “anchor” store from a
shopping center. Too often, several small shop owners are
devastated by the loss of traffic. Similarly, the closing or
downsizing of a major employer will impact businesses that
catered to employees and their families. This possibility is
especially real in medium to small cities. On a larger scale,
the post Cold War downsizing of our military has impacted
hundreds of cities and thousands of businesses. The
entrepreneur must ask this question: Are there key
determinants to my success that depend on the stability of
other businesses or organizations? If so, what is my
contingency plan if that organization is negatively
impacted? If I could not survive, is the risk of upheaval
high enough that I should not start?

It Isn’t Necessarily Bad News

Note that the worst of our scenarios is acceptable if
the entrepreneur is ready. Readiness usually takes these
forms:

• Insurance: protection against catastrophic loss

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• Diversification: a shift into emerging market

segments—or completely different businesses—as a
hedge against declining segments of the business
• Orderly withdrawal: a predetermined plan to close or
sell the business at a certain point
If your business is competitive, the uncontrollable
forces likely affect you and your competitors alike. If you
have done a better job of preparation and anticipation,
negative forces can actually improve your competitive
position. It is not uncommon for crowded industries to
experience “shake-out” during down periods followed by a
healthier climate for the survivors during the next up-cycle.

OK, we’ve now discussed all twelve of our

torpedoes. If you are reading these words, you have hung in
there during a pretty rough trip. Hopefully our cautions will
be helpful as you increase personal savvy and increase the
success of your business.
I wish you the very best as you sail forward.

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 Forces Outside Control

To Ponder and Discuss

1. What are the key tax issues affecting your business?

2. What are the key governmental regulations affecting you?

3. What are the key economic issues affecting your business

now: changing demographics, inflation, labor market,
competitive activity, or others?

4. What are the longer-term fashion or economic issues that may

affect your business?

5. Have you actively made contingency plans to cushion a

downturn in the overall economy or your particular marketplace?

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