Jun 122017

How To Start A Business Destined To Fail

No one in his or her right mind sets out with the intention to start a business that is destined to fail. Still, many people unknowingly make preventable mistakes when they start a business, many of which greatly increase the probability that their businesses will fail.

Let’s jump right into five of the common mistakes I see entrepreneurs make that put their startup behind the eight ball from day one.

Start A Business Fatal Mistake #1

The easiest way to start a business that has a high probability of failure is to pay no attention to what prospects in your target market need, want, and most importantly, are willing to pay for. This is the “if I build it, they will come (and buy)” mistake that is repeated frequently by startup entrepreneurs. Many entrepreneurs build something that they would want (and maybe would even pay for), rather than building something that their target market wants and will open their wallet to pay for.

Start A Business Fatal Mistake #2

Another quick road to failure in a startup business is to base the business on a product or service that cannot be delivered profitably.

This mistake usually results from a combination of lack of necessary analysis of estimated profitability and unrealistic expectations regarding pricing the market will accept and embrace.

There is never certainty regarding pricing that will work in the near- and long-term, but that is not an excuse to not do pre-venture, direct research with prospective customers, nor is it an excuse to skip relatively simple, but informative exercises such as calculating the estimated break-even point.

Start A Business Fatal Mistake #3

Starting a business with inadequate funding is another way to create a business that is destined to fail. Although it will always be just an estimate, as unexpected costs will come up and most everything in a startup takes longer and costs more than expected, you must go through the process of estimating the capital needs of your business, at least for the first three years.

You need to understand if you have enough capital to fund the business until it reaches break-even and starts generating cash. If not, you will need to raise capital, and it will be important that you don’t wait until you need the cash badly, or worse yet, until it’s too late.

Remember, not all businesses fail because there is a lack of demand for their products; some businesses fail because they experience initial success that puts a strain on their cash flow and they cannot then raise enough money to keep the company going. Given the variety of funding sources available these days, it’s not as common as it used to be, but it does still happen. Don’t let it happen to your business because you haven’t taken the time to understand the likely funding requirements to get your business to break-even and beyond.

Start A Business Fatal Mistake #4

Running a startup that grows into a successful small business is not a battle; it is a war. It takes commitment and perseverance to provide the energy necessary to nurture your startup business from infancy to adulthood, or even just to adolescence. Typically, it is not possible to infuse such energy into your business on an ongoing business unless you are 100% committed to that business.

You must, therefore, believe in your heart of hearts, before you start the business, that growing the business is something to which you are 100% committed.

As in most endeavors, in the startup game, “dabbling is a root cause of failure”. You cannot and must not allow your attention or energy to be diluted by the many potential distractions (“shiny objects”) in today’s world, if you expect your startup to grow into a successful small business and beyond.

Start A Business Fatal Mistake #5

It typically takes time, sometimes even years, for a startup to gain critical mass and momentum in sales. As mentioned above, you need to do your best to estimate the break-even point and the expected timing of reaching that milestone. That said, you must also understand that it will likely take longer and require more investment than you expect to reach the break-even stage and move into positive cash flow.

So, the mistake you have to avoid here is pulling the plug on a potentially successful venture too early, because you don’t see immediate or very rapid success. That’s not to say it’s always the wrong move to pull the plug on a startup that is going nowhere, but before doing so, you have to make sure your expectations for speed to success are realistic. If you are gaining critical mass in your customer base, but it’s just taking a bit longer than expected, that may not be sufficient reason to abandon ship and declare the venture a failure. Do so only after careful review of the situation.

What are other fatal mistakes you’ve seen committed, or committed yourself, in starting a venture?


I look forward to your thoughts and questions.


Paul Morin





Jun 092017

Think Of A Startup As A Metaphor For Life

A startup is nothing if not a roller coaster, with highs and lows, running fast and slow, and everything in between. Does this not sound similar to life in general?

Perhaps if we think of running a startup as similar to running our lives, we can better deal with the phases and inevitable ups and downs that are inherent in being an entrepreneur.

So let’s have a little fun and get a little philosophical as we head into the weekend – let’s look at the phases of our lives and our startups.

Birth and Infancy

Our startup is born, just as we were. At birth, we know next to nothing and we are entirely dependent on others for our continued existence. Not all startup entrepreneurs know next to nothing, of course, but I’d argue that regardless of prior experience, their success in a particular startup typically is largely dependent on those around them. This is one reason that successful, seasoned entrepreneurs with strong networks are highly valued and sought after by early stage investors. They understand that the serial entrepreneur essentially has the advantage of being born again, in the form of a new startup, but this time with all the knowledge they’ve gleaned from mistakes made in previous startups.

Toddler Stage

As the saying goes, you need to crawl before you walk. Per above, if as a serial entrepreneur, you’ve already “learned to walk” in a previous startup, then you have a distinct advantage. If you’re new to the startup game, though, you will likely have to learn to crawl first, like most everyone else. This process will include falling down, bumping your head occasionally, and learning through the tried and true method of trial and error. If you are unable to learn from your mistakes, or are impatient and try to skip the toddler stage, there’s a good chance you will be stopped in your tracks and will not be able to move on to the next phase in your startup.

Early And Middle Childhood

For humans, this phase would be from roughly three to eleven years old. For a startup, it would likely be from roughly two to five years old, depending on many factors, including the rate of change in the relevant industry. This is the time during which you start to gain a better understanding of what’s going on, and if you’re keen to learn and you have good teachers (a good “support infrastructure” in general), you tend to progress faster than those around you. If you don’t have a good support infrastructure and/or are unwilling or unable to learn from and course-adjust based on trial and error, you’re in for a difficult few years. Further, if you do not learn and make adjustments during this phase as a startup, your odds diminish greatly for making it to the next phase.


It’s in this stage, in life and in your business, that you’re now likely to make improvements and/or mistakes that could be life changing. If you’ve been paying attention during the earlier phases, it’s during adolescence that you think you have it all figured out. Now, magically somehow, you no longer need or accept advice from those around you, including those who’ve made most, if not all, of the mistakes you’re about to make unnecessarily. This is a very dangerous phase, both in life and in business, where you usually don’t know enough to make great decisions, but you definitely know enough and are overconfident enough to do some serious damage. The hope is that, both in business and in life, you can swallow your pride enough to take counsel from your “elders” and navigate your way through adolescence.

Maturity, And With Luck, Old Age

Assuming you’re able to navigate and survive adolescence, you’ll likely come out the other side with increasing maturity. You will now gradually become what you didn’t trust – an elder – in your life and in your “startup” (which is now far beyond startup phase). As a mature adult, you can now decide how you want to spend your most productive years. In business, you’ll usually want to “stick to your knitting” and continue whatever momentum you’ve created in your core business, only moving into new markets and opportunities after the careful analysis and consideration you can perform with the knowledge you’ve accumulated over time. This is quite similar to life, in that once you’ve gotten your life on a track you’re happy with, you want to be very careful not “screw it up” as a result of shiny object syndrome.

In business, as in life, assuming you survive the various phases discussed above, you’ll reach “old age,” where hopefully, you’ll spend some time sailing into the sunset and enjoying the success you’ve created.

The main takeaway from thinking of a startup as a metaphor for life is that in both business and life, you will go through phases.

It’s natural. It happens. It’s not something to lament. Enjoy the phases as you pass through them. Learn as much as you can in each phase, so you can make the phases that follow that much better.

Realize that with startups, as with life, most phases don’t go exactly as planned. Be willing and ready to adapt to whatever is thrown your way. In our dynamic world, the ability to adapt is fundamental to success in business and in life.


Paul Morin




May 042017

So You Want To Start A Business

Ok, so you’ve made the decision that you want to start a business. That’s great! Congratulations! Being an entrepreneur and living the “startup life” can be great! It can also, however, be extremely challenging at times, so you’ll want to make sure that it is the right decision for you.

Since starting a business is a decision that some people learn to regret, I want to encourage you to ask yourself three very important questions before you take the plunge. There are many more questions you should being asking before starting a business, of course, but these are three critical ones:


Why do I want to start a business?

There is a variety of reasons to start your own business. Maybe you are tired of working for and lining the pockets of others. Maybe you believe that being your own boss will be less work, or at least if you do have to work hard, you’ll be working for your own account. Maybe you’ve seen others enjoy extraordinary success as entrepreneurs and you’d like in on that action. The list could go on and on, but let’s address the reasons above, for starters.

Being tired of working for others can be a great motivator! Just realize that even if you don’t have a direct boss as an entrepreneur, there will always be people you are “working for,” including, and especially, your customers. Depending on the industry you’re entering, the level of competition and how demanding your customers are, you may find out that sometimes it doesn’t feel like you are your own boss, even if you own the business!

We won’t spend much time here on the idea of being an entrepreneur as being less work than working for others – it’s not! It starts and ends with you, so you are “on” 24/7. As an entrepreneur, you will likely find it very difficult to get mental health time to just relax and rejuvenate.

What if you’ve seen others be very successful, perhaps in a short period of time and you want to get in on that? Some entrepreneurs do reach extraordinary levels of wealth and success, but realize that usually those who appear to have gotten there quickly have most likely been at it, usually with a history of learning through mistakes, for a long period of time! There are very few instant successes in entrepreneurship!


What is my commitment level to the startup I’m about to create?

Following on what I said above about there being few instant successes in startups and entrepreneurship, realize that you are most likely in for a marathon, not a sprint! That’s true even if you feel like you’re running so quickly most of the time that it’s hard to catch your breath!

So, I ask again, what’s your commitment level to the business that you’re considering starting? Is it something that you can picture yourself doing, day and night, for many years to come? Could you be happy over a long period of time working in the business you’re looking at starting? If not, I’d strongly encourage you to rethink whether it’s the right business for you!


Is there an exit strategy for the company I am creating?

No matter how much you think you’ll love your startup and the business as it grows, at some point you are going to want to or have to get out of it – you will have to make an exit.

Is there a potential exit strategy for the business you are starting, or will you “be the business”? It’s not necessarily a non-starter if you can’t see a clear exit from your business for the get-go, but I can tell you from experience that it will become a lot more relevant as time goes on!

Some of the potential exit strategies would include selling your business to a third party buyer, or to employees, or even to your family members. In very few cases, you may also be able to take the company public or find other ways to refinance it to achieve some level of liquidity. However you think you may be able to exit the business, other than simply shutting it down and selling the assets, if any, for pennies on the dollar, you’ll want to consider that ahead of starting the business and factor that into your decision on whether it’s the right business for you to start.

Consider the questions above and other factors that are relevant to you, before you start your business! Be thoughtful in the startup process and you’ll greatly increase your chances of starting and building a business that will meet your financial needs, and equally important, allow you to be happy over the years to come.


Paul Morin




Apr 062014

What Boomer Businesses Have Going for Them

By Lynne Strang

John Olson was 40 years old when he founded Graystone Industries, a Georgia-based pond and fountain supplies business. Today, Olson’s company is among the leaders in its industry. But what if he had started it ten years earlier?

“It would not have been successful,” he says. “I could not have run a company as a younger man.”

Olson isn’t the only 40-and-older business owner who feels this way. Between 2011 and 2013, I interviewed dozens of late-blooming entrepreneurs to write a book about the success principles they used to start and operate their businesses. Most said they could not have started a business in their 20s or 30s — or if they had, it wouldn’t have turned out as well.

That revelation is noteworthy for those who dream of owning a business but wonder if they’re “too old.” If you count yourself in this group, you can stop wondering. For some people, a later start may increase the odds for entrepreneurial success because it allows time to develop certain characteristics and assets. Among them:

A bigger and better network. In entrepreneurship, the “It’s not what you know, it’s who you know” adage matters. The longer you’re around, the more people you know – and the more likely it is that you’ll have the connections needed to open doors, obtain technical advice, market products or services and find the right help.

A stronger financial position. A later start can provide an opportunity for entrepreneurs to accumulate personal savings — the most significant source of funding for startups, found a 2009 survey of entrepreneurial company founders funded by the Ewing Marion Kauffman Foundation. And while banks usually don’t lend to a first-time entrepreneur, an older one may have a chance. That’s because he or she has had time to build financial assets, establish a credit history and cultivate relationships with lenders.  

A commitment to customer service. Many 40-and-older entrepreneurs are passionate about great service for customers because they’ve been one for so long. They understand the frustrations of long waits, unanswered phones, unreliable quality and indifferent salespeople. As entrepreneurs, they tend to be patient when resolving service issues and practice the Golden Rule. This wins customers’ loyalty and keeps them returning for more.   

More resilience. Older entrepreneurs have lived through peaks and valleys – an inevitable part of starting and operating a company. For younger business owners who haven’t endured as many life events, lean times and dips in business may cause more angst. When you’ve weathered a lot of storms, you know the sun will emerge again eventually.

A grip on reality. People who start businesses after age 40 tend to be more practical about timelines, resources and expectations, which helps them set attainable goals. Among those who concur with this idea is Ken Yancey of SCORE, a nonprofit that provides free support for aspiring and new business owners. At a recent Senate hearing, Yancey pointed out that “encore entrepreneurs” have sensible financial expectations and are “realistic in their scope and projections.” 

Self-knowledge. Older entrepreneurs know who they are and what matters to them. With this self-awareness, they can build profitable businesses that also reflect their core values and provide personal gratification. Julie Savitt, owner of Chicago-based AMS Earth Movers, is a prime example. “It took the first 40 years of experiences to identify the strengths and weaknesses that define who I am today,” she said.

Not every boomer who wants to start a business is cut out for it, of course. If you haven’t followed through on your entrepreneurial idea, it’s critical to evaluate why. Inaction may indicate habitual procrastination, a lack of commitment or motivation, poor time management skills, inadequate resources or an inability to focus. Each of these could doom a company before it gets off the ground.

On the other hand, an unborn business could be the result of a timing issue. For a variety of reasons, such as young children who needed full-time care or a spouse’s demanding career, the earlier years may not have been conducive for a startup. In addition, student loans, car payments and/or other typical bills for younger families may have required a steady income and made it difficult to set aside seed money. The passage of time can remove or ease these obstacles, clearing the way for a successful business undertaking.

The bottom line? If you possess the drive – as well as a viable business idea and sound financial footing – an ideal time to act is when you have gray hair. The second half of life brings wisdom and other benefits that weren’t available earlier. By applying this life experience to your business, you just might take it to another level

Lynne Strang is a writer and communications consultant based in Northern Virginia. She is the author of “Late-Blooming Entrepreneurs: Eight Principles for Starting a Business After Age 40.” Her email address is lbstrang@gmail.com..

Nov 142012

Should I Start A Business?  Probably Not.

Some people ask themselves this question quite often:  Should I start a business?  For most people, in my opinion and experience, the answer is,  “Probably not, at least not yet”.

The fact is that many startups have little chance of success from the outset.  They are ill conceived and often based solely on the entrepreneur’s desire to have their own business.  That is, they are not created to address a market need that the entrepreneur has identified; they are created in more of a hopeful, “if you build it, they will come” kind of way.

I’m not saying that such businesses can’t succeed, just as I’m not saying that people don’t win the lottery; they do, but the odds definitely are not in favor of such an outcome.

Many of the most successful entrepreneurs I know will not consider starting a business until someone comes to them and tells them that they have a need that is not being adequately served by the marketplace.  Since most of these entrepreneurs are not really passive types, they don’t sit around waiting for people to come to them with this news.  Rather, they constantly have feelers out for where businesses and consumers are experiencing frustration.

Successful entrepreneurs then sift through those frustrations to identify which ones are true business opportunities – the ones where customers are willing to pay sufficient sums of money to solve their problems.  Sufficient, in this case, is defined as “enough to make selling the product or service profitable to a level that it is worth making the investment and taking the risk to start and run the business”.

How many businesses do you know of that were started in this manner?  How many businesses have you started this way?  Again, I’m not saying you can’t be successful by just starting up and “course-correcting” along the way.  I’m just saying that you can do yourself a favor and increase your odds of success by identifying potentially profitable products and services before you invest the (serious) time, effort and many times, capital, necessary to get a business off the ground.

Understand, too, that it is not as though you are going to have a monopoly on the solution to a particular problem or frustration that the market is facing.  If you do, congratulations, but that would be highly unusual.  In most cases, once a particular business comes up on the radar as a decent profit opportunity, a lot of new entrants will come onto the scene.  At that time, in most cases, you can expect competition to increase significantly, which usually means there will be pressure on prices and profit margins.  That’s one of the reasons that it’s so important that the margins you expect at the beginning of the venture be very healthy; that way, they can take a hit and you can still have an attractive business.  Ideally, you should be looking for initial gross margins in excess of 60%.  Such businesses are not easy to find, but they’re out there.

Do yourself a favor and don’t put yourself behind the eight ball from the get-go by selecting a business that has weak margins from the outset, or worse yet, by selecting a business that has weak margins and does not address an identified market frustration / opportunity.  Entrepreneurship can be challenging in its own right, so don’t make it more challenging, or even impossible to succeed, by selecting a “dog” from the start.

I look forward to your thoughts!  Please leave a comment (“response”) below or in the upper right corner of this post.

Paul Morin




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May 092012

ask your market

Before Launching A New Product Or Service

Before launching a new product or service, or even a new business, what do you think is the most important thing you must do?  Is it to read a bunch of market research reports?  Is it to look at what your competitors are doing?  Is it to calculate the gross profit you will make on each unit you will sell?  While these are all important, in fact, the most important and most overlooked step is to ask your customers what they need!

Not everyone agrees on this point.  In fact, many prominent and amazing entrepreneurs have made statements to the effect:  “Customers don’t really know what they want, and even if they do, they cannot articulate it too well, particularly in a market research environment.”  It’s hard to argue with Steve Jobs’ success in developing extraordinary products, of course, but I think that if done correctly, asking your customers and prospects a few questions, can inform how your develop your products and services and help increase your odds of success.

In particular, along with several other successful entrepreneurs I know personally, and several others I have studied and learned from recently, I believe it is useful to ask your clients and prospects the following questions.  Then, just let them talk, or let them type if it’s a written survey.

The first question you should ask them is:  “What are the three (or five) biggest challenges you face in trying to accomplish X (whatever is relevant to the product or service you are considering offering, or more broadly, the market you are entering).”

The second question you should ask is:  “What is the one issue or risk (or potential issue or risk) you face that keeps you awake at night related to X (your potential offering)?”

The third question you should ask is:  “What are your biggest frustrations in or with X (the issue or situation you’re trying to address with your new offering).”

The fourth question you should ask is:  “What would have to happen for you to double (or triple, or whatever makes sense in the context of your offering) your productivity (or enjoyment, or whatever metric makes the most sense) in X (the area of your offering)?

The fifth question you should ask is:  “What have you already tried to solve the challenges (or issues, etc.) that you are facing in or with X?  Did they work?  If not, or if they partially worked, where did they go wrong and what worked well?”

There are other questions you can and maybe should ask, of course, but these get to the core of what you’re trying to determine before you take the next steps in launching your product, service, or business.  That core is:  what are the pain points that your customers and prospects are struggling with and what are their aspirations?

Some would tell you that it’s sufficient just to know the points of pain, but I am becoming increasingly convinced that in order to reach your peak as a marketer and entrepreneur, you must also orient yourself toward the aspirations of your customers and prospects.  As humans, we usually work hard to avoid pain, but we also strive to achieve our aspirations.  While most marketing studies and anecdotal evidence I’ve seen confirm that the instinct to avoid pain is stronger than the motivation to seek “pleasure,” your effectiveness is even greater when you can take both into account in formulating your product development and marketing strategies.

Don’t launch products, services, or businesses without asking your prospective customers about their needs, concerns and aspirations.  I know that sounds like common sense, but you’d be amazed how many entrepreneurs I’ve met who have committed the cardinal sin of launching a new product, service, or business based on their own tastes, thinking that they’re representative of what the market seeks and needs.  That approach typically does not end well.

I look forward to your thoughts.  Please leave a comment (“response”) below or in the upper right corner of this post.


Paul Morin



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Sep 052011

Entrepreneur – Be True To Who You Are

It took me a while to figure this out, but now I see it as a truism.  You must be true to who you are.  I think this is particularly important as an entrepreneur, as when you are charting new and different paths, there will never be a shortage of naysayers.  You must be true to who you are so that you will have an inner confidence that allows you to look beyond the negativity and press on in the direction of your goals and dreams.

I’ll give you an example in my own case, which was one of my early indications that it was futile for me to fight my entrepreneurial tendencies.  I had been an entrepreneur since a very young age, had done very well with it, and most importantly, loved every minute of being my own boss.  Yet, when I finished undergrad, I somehow thought it would be a good idea to go work for a large company.  As if that wasn’t enough, I went into a staid, high-end consulting environment.  The pay was good, the nice offices and prestige were abundant, and I was miserable.  In fact, I don’t remember a time in my work life when I felt more like a fish out of water!  I watched the work being piled on and the partners making excellent money.  I felt like an indentured servant.

At the point when I started “sharing” my work with other people at my “lowest on the totem pole” level, everything started to go seriously downhill.  One partner comment I remember:  “It’s not your job to delegate!  You need to do the work we give you.”  My response, “But he doesn’t have any work on his plate and I’m inundated.  Don’t worry; I’ll make sure it’s correct.”  There were many mildly humorous incidents like this.  I lasted just seven months, then left, probably shortly before they asked me to leave, to take a job with a small, entrepreneurial software company, where I felt much more at home.

It was a good learning experience for me.  I learned that I was not cut out for a large corporate job and all the realities inherent in such an environment.  I’ve had quite a bit of success in advising such companies, but as an outside advisor, not an employee.  I went through a phase, probably before maturing a bit, of thinking that one environment is better than the other, or said more directly, that entrepreneurship is better than working in corporate.  However, with time, I have come to realize that it’s not what’s better or worse.  In reality, we need both.  It’s about what works for you.  You have to be true to who you are.  My Dad spent over thirty years with the same large company, and if you asked him, I don’t think he’d tell you he regrets it.  I maxed out at seven months in such an environment.  Is one of us right and the other wrong?  I don’t think so.  You just have to be true to yourself.

So thus far I’ve talked about being true to yourself mainly when choosing between entrepreneurship and corporate.  Now let’s talk about it in a bit more depth, assuming you’ve taken the entrepreneurial path.  You must also be true to who you are as an entrepreneur.  What do I mean by that?  Well, you can take a lot of paths as an entrepreneur.  You can sell professional services.  You can open a convenience store.  You can develop proprietary technology, assemble an A-level management team, raise venture capital, and try to take your company public or sell it to a strategic buyer.  In other words, there is a very wide range of possible ways to pursue being an entrepreneur.  Before you start your venture, you should take some time to think about who you are as a person.  Consider what you like to do.  Take into account what skills you bring to the table.  Think about whether you want to work with a team or grow something yourself.  In short, you need to figure out what type of business you want to start up.

As you consider these questions, be true to who you are.  Start a business that makes sense for you.  It may not be what others recommend.  They may not even “approve”.  Who cares?  It’s your business.  You will be the one who has to run it, day in and day out.  Make sure that it suits you!  It will be your “blood, sweat and tears”.  If you start a business to try to please other people, trust me, you will never be happy doing it.

First, make sure you understand the difference between an idea and an opportunity.  Once you screen your business ideas and identify true opportunities, all else being roughly equal, choose the one that you feel the best about.  Once you’ve identified business opportunities that truly have a chance of succeeding, go with your heart!  Remember, you will spend a ton of time working on your business.  Make sure it’s something you enjoy.  Be sure it’s something that suits you at a visceral level.  Be true to who you are and you cannot go wrong.

I look forward to your thoughts and questions.  Please leave a comment (“response”) below or in the upper right corner of this post.

Paul Morin



Sep 012011

7 Deadly Sins of Startups From a Valuation Perspective

7 Deadly Sins of Startups From A Valuation Perspective

With unemployment high and good job opportunities scarce, many displaced workers are taking the entrepreneurial route and starting their own businesses.  They are hoping their skills from years of employment, often at large companies, will translate into successful small business ownership.  Many are purchasing franchises or existing businesses, while others are using their own ideas or hobbies to start their own unique businesses.  As a result, Small Business Administration (SBA) guaranteed loan applications have soared and ROBS (Rollovers as Business Startups) plans that enable workers to rollover funds from 401k retirement plans to purchase or start a business without adverse tax consequences, have flourished.  The valuation analysis required by both these funding mechanisms has revealed common flaws in these new businesses.  As a result of our active participation in the valuation of businesses for these purposes, we have identified seven common “sins” of business startups from a valuation perspective. For a perspective more oriented toward what venture capitalists and high-end “angel investors” focus on, see 11 Things Venture Capitalists Look For.

1.       The First Deadly Sin—No Financial Projections

The value of most businesses is the sum of the present value of the cash flows expected to be generated in the future.  Amazingly, many entrepreneurs and new business owners are unable to provide a set of financial projections or budgets and the underlying assumptions.  Many believe that growth of the business will just happen and that they will react to that growth by paying the bills, making purchases, etc.  The most successful small business owners prepare, in advance, a forecasted income statement (or budget) and balance sheet that detail: expected revenue growth over the next three to five years, cost of goods sold, fixed costs or overhead, profitability, and how this translates into cash flow, the need for additional asset purchases, etc.  The financial projections may show, for example, that the business will not reach break-even in the first year and that the business will incur financial losses that will use cash on hand or require additional cash infusions to continue operations and pay the bills.  The financial projections may also reveal that the company is unable to service any debt or generate sufficient cash flow to enable the owner to take a salary.  All of these are significant problems that a relatively simple set of financial projections should reveal to the new business owner.

On the flip side, many startup business owners do create a set of financial projections, but they are based on underlying assumptions that are unrealistic.  For example, some startups may be expected to experience rapid growth in the first few years; however, there is a limit to that growth and the ability of the business to sustain that growth.  With growth of a startup come certain expenses that should be anticipated, such as the need for additional staffing, supplies, purchases of raw materials, etc.  Failure to plan and anticipate this can lead to cash flow problems.  Cash is king for any business.  Lack of cash or lack of access to funds to support operations can quickly lead to bankruptcy and closure of the business.

From a valuation perspective, the lack of financial projections, or providing unrealistic financial projections without supporting assumptions, suggests to the business appraiser that the entrepreneur is “wet behind the ears” or fails to understand the implications and necessity of financial planning.  Typically, this has a negative effect on the likelihood of success and therefore, on the current and projected value of the business.

2.       The Second Deadly Sin—No Formal Business Plan

Along the lines of the first deadly sin, the lack of a formal business plan is also common among small businesses and startups.  New entrepreneurs often mistakenly believe that opening a business and putting a sign outside is enough.  It is usually the business plan that segregates viable businesses from an entrepreneur’s hobby that they hope to make into a business.  In some cases the hobby may be a viable business.  Successful entrepreneurs create a thoughtful and realistic business plan prior to opening the business to determine if the business is feasible both financially and operationally.  The business plan includes aspects such as how the business is going to market itself and generate revenues, its target market, operational plans such as staffing requirements, supplier analysis, capital budgeting or expectations regarding the need for fixed assets to start the business or maintain operations and meet growth demands, etc.  The business plan is the roadmap for the entrepreneur, telling where they are going, how they are going to get there, and what resources they need to get there.  A business plan that is well thought out and researched does not necessarily have to be a one hundred page document, but it should be sufficiently long to provide insight into the expected operations and “path” of the business.

The lack of a formal business plan in the valuation process once again suggests that the entrepreneur may not understand the importance of planning for various aspects of the business.  Just as the absence of a business plan bodes poorly for the value of the business, an unrealistic or haphazardly prepared business plan also instills little confidence in the business appraiser with regards to the entrepreneur’s ability to be successful.  A similar statement can be made about the likely confidence level of prospective investors.

3.       The Third Deadly Sin—No Break-even Analysis

A key part of the financial projections and business plan is for the entrepreneur to conduct a break-even analysis.  The traditional break-even analysis reveals what level of sales a business must achieve to cover both the variable costs (cost of goods sold) and the fixed costs (overhead), resulting in $0 profitability.  Beyond the break-even point, the business should be generating profits.  Until the company reaches its break-even point, the business must have adequate financial resources to pay the bills and fund ongoing operations.  Conducting a break-even analysis should enable the entrepreneur to test the reasonability of the business plan and financial projections.  For example, if the business needs to produce and sell 5,000 widgets per month to reach break-even but the capacity is only 4,000 widgets per month, the entrepreneur has a significant problem and will either need to cut costs to lower the break-even point or increase capacity to produce more products.  In addition to traditional break-even analysis, an entrepreneur may conduct a cash flow break-even, which shows how much must be sold for the business to begin generating positive cash flow.

A business appraiser will often consider the startup’s break-even point in the analysis of future returns and risk.  The break-even analysis can make the difference between the business having a value of $0, implying the business won’t survive, and a positive value and future prospects.

4.       The Fourth Deadly Sin—Operating On Shoestring Budget/No Working Capital

Too often, entrepreneurs believe the business will quickly generate enough cashflow to sustain operations and, thus, enter into the new business with insufficient financial resources.  They may try to operate on a shoestring budget until the business reaches cashflow break-even out of necessity due to a lack of access to additional financial resources.  This may involve getting behind on paying bills, which could hurt the business’s credit and relationships with suppliers and vendors.  Obviously, in the absence of access to additional funding sources or lines of credit, the lack of cash also can quickly result in the closure of a business.  Unexpected or unanticipated expenses can quickly lead to financial problems and growth constraints for shoestring operations.  For example, the need for an additional employee to accommodate demand, but not having the funds to hire, can constrict the business’s growth and profitability.

But just as important, business growth changes a business’s working capital.  For example, more sales create more accounts receivable and accounts payable.  The payables can’t be paid until the receivables are converted to cash without using other cash resources.  This lag can create cash flow problems for any business, particularly a startup whose financial resources often are more limited.  Adequate business planning and financial analysis at the outset can help identify potential working capital needs at various critical points in the company’s growth, enabling the entrepreneur to make arrangements for lines of credit, additional capital, etc.

From a valuation perspective, businesses that operate on a shoestring budget have high operating risk, which tends to increase overall risk and lower overall value.  In addition, inadequate working capital or lack of planning for working capital needs tends to increase the financial risk profile of a business and lower the value as well.

5.       The Fifth Deadly Sin—Lack of Startup Managerial Experience

While many startup entrepreneurs have experience in a corporate setting, few have had experience actually running an entire operation on their own.  In a corporate setting, there are already established relationships, financial resources, and managerial depth across other key functional areas of the business.  Usually, in a corporate setting, the functional areas are also managed by different people.  For example, human resources handles hiring and staffing issues, accounting handles the financial aspects and bill paying, the marketing department handles the marketing, and so on.  The entrepreneur who has come from the corporate world has likely been predominantly working in their own functional area with their unique and specialized responsibilities (except in some instances when they have been a high-level executive with full P&L responsibility).  In the entrepreneurial setting, however, they typically must wear several different hats, handling and overseeing sales staff, the accounting function, marketing, etc.  Those entrepreneurs who do not have significant cross-functional experience are often starting their business at a disadvantage, which may be evident in the lack of a business plan, financial projections, and other factors as previously discussed.  While startup ventures often require the entrepreneur to be the “chief cook and bottle washer,” no one can do it all; in most cases, it cannot be a one man show (with the exception being some professional services).  The most successful entrepreneurs have a solid understanding of all functional areas, but also surround themselves with other individuals who may have more experience in particular key aspects of business operations.  For example, a restaurant owner who is also a chef may have a mastery of back of the house operations but limited experience with front of the house operations, necessitating an individual with a skill set to fill that gap.

The business appraiser will typically consider the entrepreneur’s experience or lack thereof in valuing the business.  Individuals with little or no experience are usually considered much more risky than individuals with extensive business backgrounds, particularly if their experience is in the same industry of the new startup.  A higher entrepreneurial risk profile stemming from lack of experience will likely result in a lower value for the business.  While it is not always the case, a more extensive background and level of experience may tend to reduce the risk profile of the startup and increase the value, all else being equal.

6.       The Sixth Deadly Sin—Unrealistic Growth Expectations

Planning for too little growth and trying to play catch up when growth exceeds expectations creates a number of challenges, such as the need to expand operations and capacity and the resulting requirement for capital expenditures and potentially, additional financial resources.  However, planning for too much growth is just as bad, if not worse, in that overinvestment in equipment and materials reduces asset efficiency and return.  As mentioned before, some startup businesses are likely to experience extremely rapid growth in the first few years of operations.  However, the growth of a startup is not limitless and is bound by, among other factors, the business’s capacity to produce its goods and services.   It is easy for an entrepreneur to exhibit “irrational exuberance” when it comes to growth.  In creating growth expectations, the entrepreneur should first consider the maximum potential output of its goods or services based on available equipment, human capital, etc.  Growth over and beyond that level will require additional capital investment, as well as more financial and human resources.  In forecasting growth, the entrepreneur should, of course, also take a close look at the potential demand for its goods and services by considering the markets being served, the competition, and the potential market share that the company may gain given the size, scope, and competitive landscape.

Unrealistic growth expectations typically are easily spotted.  For example, a maker of gourmet marinades has initially good growth potential.  However, its facility can only produce enough cases annually to equal a 1% total market share.  Based on the competitive landscape, the company would need significant investment in advertising to build brand awareness in order to potentially increase its market share to 5%.  However, the revenue expectations as expressed in the company’s financial projections suggest production in the second year that is beyond the facility’s capacity and the financial projections do not account for additional capital expenditures or advertising campaigns.  Fixed costs grow by only 2% in the financial projections, yet by the fifth year, revenues for the company imply a market share of over 15%!

Based on these inconsistencies, the growth expectations obviously are “pie in the sky”.  The business appraiser will likely notice this glaring error, which tends to undermine the integrity of the financial projections as well as the credibility of the entrepreneur.  As a result, the value is likely to be negatively impacted.

7.       The Seventh Deadly Sin—No Risk/Return Analysis

One of the most difficult considerations for an entrepreneur is the risk/return analysis of the potential business venture.  An incomplete or poorly-reasoned risk/return analysis on the part of the entrepreneur may lead a savvy financial investor to turn down a potential investment in the business in favor of an apparently less risky opportunity.

Even in a world with the global financial system and markets turned upside down, there is a relatively clear relationship between risk and return.  An investor in a higher risk investment should be compensated with a higher return.  For example, an investor in a risk free asset such as US Treasury bonds would expect a return of roughly 4%.  An investor in a publicly-traded, blue chip company (a utility company, for example) may expect a dividend yield of 5-6%.  Corporate bonds have returns of 5% and higher.  A well diversified investment portfolio may have a return in the 6-12% range.  “Junk bonds” have returns of 12% or higher.  Venture capitalists expect annual compounded returns anywhere from 30% and up for “risky” equity investments in startup ventures.  Entrepreneurs should recognize that owning their own business involves significant risks.  As such, any investor (whether it is themselves or a financial buyer under the fair market value standard in business valuation) would expect a return significantly higher than that on Treasury bonds, a diversified portfolio of publicly-traded stocks, etc.

For example, suppose an entrepreneur invests $500,000 of his or her own money into their business.  For the first two years, they expect losses which they finance with external debt.  After three years, they are projecting a net cash flow to equity of $20,000, representing actual cash available for distribution as a dividend at year end.  The return in this case is only 4%, which is hardly enough to compensate for the level of risk.  A financial investor would likely opt for any one of a number of other potential investments that offer a higher projected return for an apparently lower level of risk.  For the entrepreneur, however, the investment in the business only makes sense if they factor in their $20,000 net cash flow along with their projected salary and benefits of $50,000, for a total return of $70,000 or 14%, in year three.  The financial investor will receive no salary, so the return calculation is not as attractive for them.

Many entrepreneurs are new to the business world and are overwhelmed with emotions that may tend to cloud their investment decisions.  The most successful entrepreneurs are those who proactively address the seven deadly “valuation sins” of business startups prior to starting operations.  Business owners who are reactive in dealing with these “sins” generally find themselves at a disadvantage, which can often lead to failure.  Entrepreneurs should seek to maximize the value of their business.  To do so, they must address these seven deadly sins or be prepared to face the negative valuation ramifications.

This article was written by Robert M. Clinger III and Paul Morin.  For more information on Robert M. Clinger III and Highland Global (HG), see www.HighlandGlobal.com.  For more information on Paul Morin, see HG and www.CompanyFounder.com/about.

Please leave your comments and questions below or in the top right corner of this post.

Paul Morin




Aug 242011

Are Entrepreneurs Gamblers?

I often get asked the question, “Are entrepreneurs gamblers”?  I think how you answer this question has everything to do with how you define “entrepreneur” and how you define “gambler,” so let’s start there.

For me, an entrepreneur is someone who starts a business with the intention of growing it, in order to make a profit.  Further, an entrepreneur takes pleasure in creating something that previously didn’t exist and growing it into something that “matters”.  Clearly, it is possible to be “entrepreneurial” in non-profit organizations and in for-profit organizations that already existed before you showed up – there are various types of entrepreneurship.  The simplest definition of an entrepreneur is “someone who looks for business opportunities and invests time, money and/or other resources to take advantage of those opportunities”.  You most often hear the word “entrepreneur” used in the case of startup businesses, but that is not the only scenario where the term is applicable.

Now, a “gambler,” for me, is someone who places bets, hoping to win by chance, usually against the odds.  There are various types of gambling, not all of which happen in a casino, but even within a casino, there are many different forms of gambling.  If we look at a casino as the place we most often find “true gamblers,” we quickly realize that, usually at least, when they’re playing against the house (the casino), in such games as blackjack, craps, roulette, etc, they have to get quite lucky to win on any particular occasion.  Further, if instead we look not at a specific occasion, but over a period of time and several occasions, unless they are cheating or exploiting some other advantage that is against casino rules, their probability of winning is almost zero.  The games were created that way, by the casinos.  No wonder the odds are stacked in favor of the house.

Ok, so back to the question:  Are entrepreneurs gamblers?  Based on the definitions I laid out above, I think you’d have to say, no, entrepreneurs are not gamblers.  Entrepreneurs may count on luck just as gamblers do, but I don’t think we can say that over time entrepreneurs’ probability of succeeding is almost zero, as it is for gamblers as defined above.

So if entrepreneurs are not gamblers, what are they?  They are risk takers.  To be more specific, good entrepreneurs are calculated risk takers.  They see an opportunity and like gamblers, they place a bet.  They bet their capital, their time, and other resources that they will be able to exploit the identified opportunity and create a successful business based on it.  They do depend on luck to some extent, but if they are experienced and/or have good partners and advisors, they know how to “stack the deck” in their favor, so that they don’t have to depend on luck so much.  I guess if you wanted to compare them to gamblers, you could compare them to those gamblers I mentioned above who use “card counting” or other techniques that go against the house rules.  They do not enter the game, or in the case of entrepreneurs, the venture, without some advantage or set of advantages that they, and their investors if they have any, believe will allow them to succeed in that particular business.

Frankly, I don’t really like hearing entrepreneurs compared to gamblers, at least not given the definitions I provided above.  I don’t think such a comparison does the entrepreneur, at least not the “good” entrepreneur, justice, as it has too many connotations of “shooting from the hip” and just hoping to get lucky.

As one of my close entrepreneur friends says, “without risk, there is no reward”.  It is inevitable that anyone who dares to initiate anything, including a new business venture, is taking a risk.  They are “risk-takers,” by definition.  They’re not “gamblers” though, at least not per my definition of the word.

If you are just starting on the entrepreneurial path, or even if you’ve been on it for a while, make sure you’re a “good” entrepreneur – a calculated risk taker, not a gambler.

P.S. You may have seen me compare entrepreneurship to a poker tournament elsewhere.  This is because poker is not a game you play against the house.  It is played against other players.  It is still a form of gambling, but not the type of gambling I referenced above.  While it absolutely does involve some luck, it also involves strategy and allows you to be more of a “calculated risk taker” than games against the house.

I look forward to your thoughts and comments.  Please leave a comment below or in the top right corner of this post.

Paul Morin



Aug 162011

3 Common Small Business Killers

Small businesses, even those that appear promising at the start, have an unnerving failure rate.  Here I’ll discuss three common small business killers, and what to do about them.  In my extensive time in entrepreneurship, I’ve experienced and seen them all, in my own businesses and those of my clients.  The good news is that if you are aware of these issues and keep vigilant watch, you can spot them early and often prevent them from killing your business.

Common Small Business Killer #1:  Insufficient Funding

I guess this one should come as no surprise.  Most businesses are started on a “shoestring budget” and tend to stay that way through most of their lives.  While this may be unavoidable for some who are starting a business, for others, it is simply an issue of not understanding the likely capital requirements of the business and planning accordingly.

Solution:  Perform a break-even analysis before you start your business, so you can get a basic understanding of the sales volume you will need to break even.  This will, of course, involve making many assumptions and it will never be perfect, however it will at least give you a target and a basis for understanding where you need to take the business.  It will also help guide you as you put together your pro-forma financials, including a cash flow projection, which will help you understand when the business is expected to start generating, rather than burning cash.  Realize that if you make your projections too “rosy,” you are likely to miss them and run into cash flow problems.  Project conservatively and leave yourself a buffer for projection error.  Finally, make sure you understand the potential sources of capital available and stay ahead of your capital requirements, so you’re not in a compromised position, trying to raise cash in an emergency.

Common Small Business Killer #2:  Weak Profit Margins

Some businesses have inherently weak profit margins, due to a variety of factors, but usually because of intense competition and the pricing power of key suppliers.  If you know from the get-go that you are entering a business with weak margins and little hope of improvement in that area, you’re either crazy, don’t realize this issue, or have some other ulterior motive.

Solution:  Before you enter any business, make sure you have a very good understanding of the profit margins of the business.  In particular, you should look for gross margins of sixty percent or better.  I will agree with you that such businesses are not easy to find, but as one of my first mentors told me, when you have gross margins of sixty percent or better, you can make a lot of mistakes in the remainder of your business and still survive to fight another day.  Make sure that as you are putting together the pro-forma financials for your venture, you are very realistic regarding the direct costs you will have in producing your products and/or delivering your services.  Any unrealistic assumptions regarding these costs will give you an inaccurate picture of the likely gross margins you will enjoy in your business and make your pro-forma financial projections misleading and dangerous.  Likewise, be very realistic about how you will be able to price your offering, as this will be the other determinant of the gross margins you will be looking at.  Finally, be realistic about how these direct costs and pricing power are likely to change over time, given the competitive forces and other market trends you see at work in your industry.

Common Small Business Killer #3:  Unskilled Management

The unskilled (or under-skilled) management issue occurs quite a bit.  Two scenarios where this issue is particularly common are: 1.) a person comes out of a larger corporate environment with a very specific skillset and decides to become an entrepreneur; and 2.) a family business employs its family members in key management and leadership positions, regardless of the fact that they don’t have the experience or the skills to do the job well.  There are many other situations where entrepreneurs do not have the proper skills to run the business they have chosen, but these are two of the most common.

Solution:  When you are starting a business, or even if you already have it up and running, take a close look at the types of skills that will be necessary to run and grow the business effectively.  If you are not sure what it takes to be great at your endeavor, take a look around at those who are already succeeding in the same or similar businesses.  Take a close look at the core skills and knowledge they employ to allow them to do well in that business.  In some businesses, the most important competency is financial acumen, in others it’s operational knowledge, in most all, it’s marketing and sales capabilities.  Make an honest assessment.  Where you see gaps in your knowledge and capabilities, partner with or hire others to fill those gaps.  Remember when you’re doing this assessment that, regardless of how talented you may be, it will be very hard for you to have the time, energy and capabilities to do all tasks well.  Be sure you have the most critical ones covered and seek assistance everywhere else.

It’s important to understand that these are just three of many potential “small business killers,” but start with making sure you have these three under control and we’ll cover some others in the future.

I look forward to your thoughts, comments and questions.  Leave a comment below!

Paul Morin