Entrepreneurship

Over the past twenty years, I have worked with hundreds of entrepreneurs, startups, and small businesses at varying stages of their success. From accountants, dentists, attorneys, politicians, and architects to non-profits, musicians, artists, event planners, and carpet cleaners; I have had a front-row seat to witness the advantages and disadvantages of running a small business. As this has been on top of the experience I have gained from running my own digital marketing and web development firm for the past fifteen years, each of these individual perspectives have served to corroborate my own understanding of what it takes to be your own boss.

Be Your Own Boss

From a distance, being the CEO of your own company looks very appealing. Rather than having to do what you’re told, you get to make the decisions and rather than getting paid a set wage, you get to take home the bulk of the profits. Additionally, if you wanted to take the day off or go home early, you can because you’re in charge of setting your own schedule. Unfortunately, the actual story of entrepreneurship is much more involved.

While it’s true that the owner of the company calls the shots and takes home the extra cash, many of the decisions that need to be made are unpleasant and there usually isn’t extra cash just laying around. When it comes to informing clients of shortages, apologizing to customers for poor performance, or taking a second mortgage out on your house in order to make payroll, these responsibilities all fall on the owner of the business. The same goes for creating the initial product/service, establishing the vision, putting up the initial capital, and dealing with the countless failures that come with launching a new company.

Candidly, if everyone legitimately understood all that went into starting a business and making it profitable and sustainable, only a select few would ever even try. The glamorous entrepreneur life that is portrayed on the covers of Fortune Magazine or by the billionaire sharks on Shark Tank may be an outcome that is possible, but the results are much different for the overwhelming majority of entrepreneurs.

For starters, statistics show that 96% of all small businesses fail within ten years of starting (posifocus.com/96percent), with the primary reason for shutting down being that they couldn’t pay their bills. This means that not only did they have to close their doors, but that they actually lost money. Having worked with so many entrepreneurs personally, this statistic doesn’t surprise me one bit. Not because the entrepreneurs I work with are incompetent, on the contrary, most of these folks are beyond experts in their field. But, just because you’re an expert in your field doesn’t mean you know how to run a successful business.

Two entrepreneurs I have repeatedly witnessed make business mistakes are dentists and artists. I’ve had the opportunity to work with folks in both of these professions on several occasions and while they all have graduate degrees in their respective fields and they each always expected to go into business for themselves, none of them were ever required to take a business course. So, even though the dentist is an expert in endodontics and the artist is an expert is color theory, neither of them were ever required to learn anything about sales, marketing, customer service, accounting, legal contracts, insurance, human resources, office management, or most importantly, profitability. Yet, they were all expected to be entrepreneurs and start their own businesses.

The same goes for every chef who wants to start a restaurant and every architect who wants to start their own design firm. While having a great product or service is absolutely mandatory, so are all of these other competencies. Whether the entrepreneur takes on the task of learning all of these skills themselves or they employ others who specialize in these areas, each of these skills are essential to creating a prosperous business.

For most entrepreneurs who start out personally funding their projects, hiring someone is probably beyond their means. At the same time, taking on an investor and giving up equity in their company is normally frowned upon with regards to long term gains. So, what is an entrepreneur to do?

Be the boss and make a decision.

Though this is a difficult decision, it is just the first in a ridiculously long line of difficult decisions that you will need to make as a business owner. You have to decide how much you believe in the potential of your business and realistically understand if you’re actually willing to make the sacrifices necessary to make this business succeed. It is this decision that separates the 4% of successful businesses from the 96% of failures.

If you truly believe in your business and your ability to execute, then you should be willing to invest your entire life savings, max out your personal credit cards, cash out your retirement fund, and take out a second mortgage on your house in order to secure the funds necessary to launch your company. But if this isn’t something you’re willing to do, it calls into question your commitment to the future success of this business, especially for potential investors.

If you are open to selling equity in your company to an investor, that investor will want to see that you yourself are fully invested before they give you their hard-earned money. Though the idea of using other people’s money to initially fund your business is appealing, it is usually unrealistic. Until you have some sort of proven track record of sales and a positive cash flow, most investors will see your company as too risky.

So, if you don’t have all the capabilities necessary to run a business, you don’t have the startup capital to hire someone, and your company is too new to attract an investor, what options do you have left? Either you can find a partner or two that have the competencies you lack, or you can go find a regular job and leave the entrepreneurial dream for someone else to chase.

Partnerships

Forming a partnership with like-minded individuals can be a great way to get a business off the ground, but finding the right partners is essential to the viability of all future success. As history is full of business partnerships that ended in courtrooms, it is paramount that you not rush into a half-baked business agreement with someone you hardly know . Just because someone has the hard skills you need doesn’t necessarily make them the correct choice for your company. Since entering into a partnership is the business equivalent of getting married and having kids together, an extreme amount of due diligence should be done before joining your future hopes and dreams.

Like with potential clients, potential partners should be perfectly in line with the values, vision, and mission of the company. If for some reason you haven’t established the values, vision, and mission, it is going to be very difficult to measure whether a potential partner is going to be a long-term asset or liability to the success of the company. For some, this may seem overly detailed, but the fact that 96% of all small businesses fail is more than enough to justify the need for these details to be addressed and established upfront.

Just because it is easy to start a money-making lawn care business with one of your buddies, doesn’t mean that the details are trivial. Perhaps the vision, mission statement, and corporate values might not seem relevant on day one, but as soon as something goes wrong, they will be the primary thing that matters. Whether it comes about because a lawn mower threw a rock and broke a window, and you have to cover the repair costs, or because you’ve been using one partner’s truck and it needs new tires, sharing the same beliefs about the company is going to make or break these interactions. Even worse is when one partner feels like they’re doing more work and deserve more money. This is when the partnership is really put to the test, and the exact reason why a very clear and concise operating agreement is necessary.

An Operating Agreement is a legal contract that clearly defines who is a partner in the business, how much each partner initially invested, what equity position each partner holds, what their legal responsibility in the company is, how they will get paid, and what legal process needs to be followed should any partner want to change the status of their involvement. Initially, this document can be very intimidating for anyone that doesn’t have a law degree, but, if done well, it can be a short ten-to- fifteen page contract. As the purpose is to very clearly protect each person’s financial interest in hopes of being able to maintain friendships if and when the company is dissolved or one of the partners wants out, this is a very worthwhile investment.

Clients

When it comes to clients, I believe that my best advice would be to proceed with caution. After twenty years in client services, I can say that I have experienced the full spectrum of clients. From “dream clients” that trust your expertise and pay their bills on time to “clients from hell” that have unrealistic demands and non-existent budgets, I have learned that each client should be very carefully assessed.

Unlike customers that might only be making a one-time purchase from you, the most fruitful client relationships are the ones that last. From this perspective, taking on a new client can be more serious than taking on a new partner as you will essentially be working for them. Not only does this diminish the glamour of “being your own boss,” if chosen poorly, you will actually be at fault for hiring a boss you don’t like. For many inexperienced entrepreneurs, so long as a client has money then they will likely take them on. On the contrary, I require that every client must meet the following criteria before I enter into a working relationship with them:

1. The Client must trust my expertise.

I have 20+ years of experience in my industry. Just as I’m sure the client is an expert in their field, I expect to be treated as an expert in mine. This means that I am trusted to do my job and that my opinion is considered an expert opinion.

2. The Client’s product/service must meet a moral and ethical baseline.

Regardless of how much money there is to be made making porn sites and scams that take advantage of senior citizens, I have no interest in being involved with either of them. Though it is very difficult to decline a high paying customer, it is not worth having to live with the moral debt that comes from working with unsavory characters.

3. The Client must be a reasonable person who is easy to get along with.

Overwhelmingly, my clients become friends, if not family. Through our working interactions, we grow to care deeply about each other’s success and appreciate the expertise that we each provide toward the betterment of the world. Having had many outstanding client relationships, it really doesn’t make any sense for me to settle for anything less.

4. The Client should be able to pay their bills in a timely manner.

Financial security should probably be more important to me than it is, but I consider it last because I’ve had wealthy clients with super difficult personalities. As such, I’d rather have a great friend that pays their bills late than deal with a jerk that pays their bills promptly.

In order to accurately qualify a potential customer, I offer free client consultations to anyone who is interested in working with me. This usually consist of grabbing a coffee or a happy hour drink together and simply talking about their project. As I have a strong background in sales, I am able to ask an infinite amount of open-ended questions. This allows the potential client to voluntarily disclose all of the information about their project that I would need to make an educated decision about whether I want to work with them. Through their answers, I am also able to uncover and dig deeper into any potential landmines or pitfalls of doing business with them.

By the end of this client consultation, I usually have a very good idea about the client’s business, their character, and how much I should quote to complete the project.

Pricing Models

Using profitable pricing models is fundamental to the long- term success of every business. Using the wrong pricing models can turn an otherwise profitable product into a huge financial liability, while using the correct model can make the difference between surviving and thriving in the marketplace. Though there are many different pricing models, I am only going to cover the advantages and disadvantages of the three that I use the most.

Hourly Pricing

Hourly pricing is the most common pricing model for service-based companies. By-the-hour is how most companies pay their classified employees, so it makes sense for them to bill their clients in the same manner. The advantage to this model is that the company is always profitable, assuming that their hourly rate is covering their costs. However, the disadvantages to this model are multifaceted.

First, the client is never exactly sure how much they are going to be charged, as some parts of the project might take longer than originally quoted. Second, this model puts the client at odds with the vendor. While the client wants the vendor to work quickly so they can pay the least amount possible, the vendor is incentivized to work slower so they can bill the client for more hours and make more money. Third, this model perpetuates the practice of trading time for money, which is highly frowned upon by people who have extensive knowledge and experience. Though it may only take and expert an hour to complete a complicated task, it likely took years of practice to master their technique. Lastly, charging by the hour will eventually limit a company’s earning potential because regardless of how much experience a landscaper has, no one is going to pay them $75/hour. Likewise, no one will pay an auto mechanic $300/hour or a web designer $500/hour.

Project Pricing

Project Pricing is the practice of establishing a flat rate for a completed project upfront. This is incredibly advantageous for clients as they know exactly how much the project is going to cost. Having a set price also incentivizes the vendor to work faster, because the faster they work, the more money they make per hour. For example, if the price for a project is $10,000 and it takes the vendor 100 hours to complete the project, they effectively make $100/hour. But, if they finish in 25 hours then they would make $400/hour. Likewise, if the vendor decides that they want to spend additional time making sure that the project is absolutely spectacular and make a little less per hour, they are empowered to make that decision without hurting the client. This shift from hourly pricing eliminates the limited earning potential and puts the client and the vendor on the same team, as it is in both of their best interests for the project to be completed as quickly as possible.

Though there are many advantages to Project Pricing, one major disadvantage is that you can lose money on a project if you fail to provide an accurate quote upfront. While an experienced vendor is able to rely on their historical data to provide accurate quotes that ensure profitability, vendors with limited experience usually find it nearly impossible to know how much time and expense is going to be incurred at the beginning of a project.

Even if your initial quote was accurate, there is always the potential for scope creep. Scope creep happens when the amount of work the clients requests gradually increases over the life of the project. Whereas an experienced vendor would add in margin to their quote to make sufficient allowance for this scope creep, the rookie vendor would be losing money from the moment of the client’s first additional request.

Value Pricing

I actually learned about this model from Dan Mall. I’m unsure if he personally invented it or simply popularized it in the Web Design industry, but I have found it to be a legitimate method. (posifocus.com/danmall)

Value Pricing is very similar to Package Pricing, but with one additional variable in the equation. Rather than simply basing a quote according to the general market value of the product or service, this quote also takes into account the current value of the project to both the vendor and the client.

If a vendor is currently booked with a waiting list of clients and a new potential client has an immediate need, the vendor could charge a premium for their services. Likewise, if the vendor doesn’t currently have any work and is in desperate need of a new project, they may offer their services at a deep discount.

From the client perspective, if the client is going to generate millions of dollars of revenue by using the product/service, the vendor could charge a premium or even ask for a commission or percentage as a bonus. On the contrary, if the client is a non- profit that isn’t going to generate much revenue at all, perhaps the vendor could offer the project at cost.

Equally important is how much the client/customer wants to spend. As Bonnie is a Ceramic Artist, I have had the opportunity to interact with a number of wealthy art collectors who are only interested in purchasing expensive art. Often times, the difference between fine art and a craft project is determined by the price tag more than by the quality of the work. For many affluent clients, paying a higher price is a status symbol and they associate higher quality with a higher price.

The Best Pricing Model

So, which pricing model is the best? It depends.

Overwhelmingly, I use the Project Pricing model as I have enough experience in my field to accurately quote projects in a manner that makes it a great value for the client and extremely profitable for myself. Plus, I simply hate the idea of trading time for money. Even on small projects where I could charge by the hour, I find it much more pleasant for all parties involved to simply set a project price.

One key to using Project Pricing is that you must fully understand the project upfront, which makes a high-quality client consultation extremely important.

I sometimes use the Value Pricing model as I enjoy doing free work for non-profits and find it necessary to charge a premium for clients I suspect will be overly demanding. However, this is the exception to the rule.

If at all possible, I do my best to stay away from hourly pricing as I believe the overall disadvantages outweigh the advantages. Additionally, as I consider time among the most valuable resource on earth, I am staunchly opposed to trading time as a commodity for insignificant amounts of money. Instead, I would rather trade my knowledge and experience for money as they are more valuable.

Contracts

Have you ever heard a good lawyer joke? Of course you haven’t. There is no such thing as a “good” lawyer.

Of course, I’m just kidding.

Though lawyers and politicians are often perceived in a negative light, they serve a vital role in a society that doesn’t always live up to its commitments to one another. Whether by malicious intent or simply poor planning, it is an unfortunate fact of life and business that not everybody keeps their promises. Which is why we need contracts.

Like an Operating Agreement between partners, the purpose of a contract is to clearly define the agreed upon expectations of both the vendor and the client, so that both parties are on the same page. Depending on how you like to do business, this contract can be a formal document drawn up by an expensive law firm, it could be an itemized quote sheet made in Excel, it could be an email with the details of the agreement, or it could be some scribbles on the back of a napkin.

I personally dislike complicated contracts that address every possible scenario in which a dispute could occur. Though these contracts are useful in a courtroom, they are of no use in situations where the legal fees would be greater than the finances being disputed. In other words, if a contract involves a project worth tens of thousands of dollars (or more), then having an exhaustive contract makes sense. But if a project is only worth $2000, then it wouldn’t make financial sense to hire a lawyer for $5000 in order to sue someone to recoup your $2000.

When the size of the project does warrant a contract, the only way I actually enter into an agreement with someone is if I’m confident that the contract is completely unnecessary. This means that if I’m not comfortable doing business with someone based solely on a handshake deal, then I obviously don’t trust them, and I definitely shouldn’t be entering into a written contract with them.

This method of only working with people who I believe can be trusted at their word is an effective litmus test for any business relationship. Though a contract may dictate the pre- established rules of an agreement, in no way does it protect you from headaches, stress, frustration, or wasted time caused by dealing with unethical clients. You must rely on your personal judgment of character to protect you from that.

Hire Slowly, Fire Quickly

Both in friendships and in business, the most successful relationships are the ones where we take our time at the beginning and cut our losses quickly at the end, so we can move forward. Unfortunately, our impulses regularly lead us to do the exact opposite. Rather than comprehensively evaluating new relationships, we tend to rush in. Then, when we figure out that the relationship was a bad idea, we drag our feet and prolong cutting ties.

To combat this ineffective method of managing relationships, I have adopted a “Yes man” mentality when it comes to dealing with new opportunities and relationships. Whereas Bonnie is a “No woman” in that her initial response to everything is “no” until she has received sufficient information, I say “yes” to everything until there is sufficient information to decline.

“Interested in hearing about an exciting new opportunity?”
Yes.
“Would you like to earn and extra $10K every month?”
Yes.
“All you have to do is sign up for our seminar!”
No thank you.

From new friends and new job opportunities to a new lawn service and a new workout plan, I’m always open to improving my life. But as soon as I determine that the opportunity isn’t authentic or beneficial, I immediately walk away and I don’t look back.

CEOs vs Humanitarians

Do you know why humanitarian missionaries have to pay their own way to go serve?

Because it’s that rewarding.

When it comes to working with underserved communities and helping folks that can’t pay for your services, the reward comes from the act of service itself and the feeling you get from doing good. The reason that humanitarian aid workers don’t get paid is because they’ll work for free.

Do you know why taxpayers pay teachers so little when compared to the value that they provide to our society?

Because they can.

Every time teachers go on strike and demand higher wages, the taxes payers give them a raise. So, why don’t teachers go on strike more often? Because they’re not in it for the money. They’re not teachers because they want to become rich, they’re teachers because they want to make the world a better place, one person at a time, and their job empowers them to do so. The salary is more like a bonus when compared to the fulfillment that they get from impacting the lives of their students on a daily basis.

Do you know why CEOs get paid so much?

Because nobody would take the job if they didn’t.

Yes, CEOs of major corporations are paid obscene amounts of money, but when you consider what it costs them personally to obtain this position, who in their right mind would do it for less money? When you take into account that the average CEO has been married to their corporate position 24 hours a day for the better part of two decades, it is likely that they’ve literally sacrificed their marriage and parental duties more often than not. Between the long days, late nights, never-ending responsibilities, and stresses that come with the climb to this position, anything less than an obscene paycheck just wouldn’t be worth it. The paycheck is often times the primary reward.

That said, it is vitally important to understand that while starting a company is as easy as filing a few forms on a government website, running a successful company long term will likely cost you the overwhelming majority of your time and attention and the probability of your success is less than 4%.

Entrepreneurship may appear sexy from a distance, but the reality is that every win must be earned and very few people actually have the discipline and focus to pull it off.

Posifocus Mantra #15

96% of Small Businesses Fail.

Reflection

Do you have an idea for a business? What are you willing to sacrifice to get this business off of the ground? What are you going to do differently so that you join the 4%?

Challenge

Visit the Small Business Resource Center at your local Chamber of Commerce and put together a business plan. They have a ton of free resources to help you start your business.

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