Top 10 Worst Things to Do in Business
So, a lot of these articles are prefaced with the disclaimer “the following is not legal advice…” or something to that effect. This one is legal advice, guys, and I am not afraid to say it. The following list makes up the 10 most common reasons I’ve seen for businesses failing.
The Top 10 Worst Things to Do in Business:
10) Don’t Fund the Company – Businesspeople are notoriously optimistic. Know that if you are a businessperson, then you probably have this limitation. Starting a business will not cost you $1,000. It probably won’t cost you $5,000. But relax, if it is a good idea, you will make that up quickly. Just don’t scrimp at the beginning. It never works and those are some uncomfortable conversations to have between the partners.
9) Have No Estate Plan / Succession Plan – I know none of you are going to die, but let’s say we are talking about another guy. That guy was going to get his estate plan done at the beginning of the year. But he dies without one. Now, via the Florida statutes, half of his estate goes to his wife and the other half is split evenly amongst his children to be administered by a guardianship named by a judge. The ownership interest in the company is split this way as well. Now imagine if there is another partner in the business. Yep, it sucks. Don’t do it.
8) Improperly Classify Workers – Just because you call someone an independent contractor does not mean that they are an independent contractor. You don’t get to decide that. The IRS and other governmental organizations do. So if you really don’t want employees, then structure their jobs to look as close to independent contractors as possible. Otherwise, the IRS will open up a can on you in the form of back payroll taxes and fines.
7) Have No Restrictive Covenants – Hey, developers, engineers, accountants, and anybody else that relies on the strength of its people – there is a reason attorneys have barred the use of restrictive covenants from our profession. It is because they work. Your top salesman is not as loyal as you, the business owner, are to the company. They will walk when given the chance. Now you have a significant amount of your revenue that is gone plus you have a new competitor. Good luck.
6) Refuse to Change – The truth of the matter is that if you are doing business the way you did it 5 years ago, you will probably be bankrupt within the next 2 years. If you don’t understand technology and don’t want to learn, then hire someone to help you with that. Because competitors can form in less time and with better products than ever. Unless you have significant intellectual property, you will lose.
5) Go In 50/50 – There is no worse ownership than a 50/50 relationship. For instance, without a well written ownership agreement, one owner can go to jail for murder and the other would need to continue to pay his salary or bring an action in court to dissolve the company. When disputes arise, the fallback position is status quo. So there is what the courts call “deadlock.” If there is no other way to own the company, then at least have a very straightforward buy-back provision.
4) Sign a Bad Lease – For many retail establishments, the lease is the most important and most costly expense. Look closely at the escalations and the options to renew. A significant increase in rent expense could mean your business suddenly goes from profit to loss overnight. And you may be stuck there.
3) Have No Operating (Stockholders) Agreement – The operating agreement talks about the most important aspects of a business – how distributions are made, when a member can sell his interest, who gets to decide what, etc. Don’t avoid this because it is a difficult conversation. The statutes favor the minority owner. You’d rather not rely on them. And for single-member entities, an operating agreement goes a long way to argue against a piercing of the corporate veil.
2) Have No Budget – This typically is a problem at the very early stages. Companies looking for funding will say things like “we are still gathering data on sales” or “our cost estimates are currently in progress.” Here is a hard truth – if you don’t know what your expectations are, then you don’t have a business. Focus there first. Before you do anything. Seriously.
- Don’t Pay Taxes – Governments don’t like businesses. Unless they pay a lot of taxes. Sorry, but it is true. And the IRS is one joker that will straight shut you down if you don’t file and pay your taxes correctly and on time. Taxes should be focused on heavily in your budget and on your calendar.