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Protect yourself against these six common reasons micro-businesses fail

Note: This was meant to be part of the Self-Made Business Academy, but the agenda is so full I decided to post it here as a blog post.

If you’ve ever told anyone about your plans to go into business for yourself, it’s a pretty safe bet someone has replied, in no uncertain terms, that you’re doomed to failure.

Then you nod and smile and keep walking your path. As well you should.

The problem is, the doomsdayers aren’t all wrong.

Self-employed, freelancers and home-based business owners have a disturbing pattern of falling flat on their faces. Or even worse, never really getting off the ground.

Here are six of the most common mistakes I’ve seen micro-business owners make over and over and over.  I’ve even made a few of them myself (okay, most of them).

So, read on and save yourself some heartache and tears and time and money.

Messy break ups are inevitable.

Burying your head in the sand will not make the world go away.

Partnerships sour. Collaborations fall through. Clients get upset….and sometimes sue you. Customers conveniently forget to pay you or claim you didn’t do the work you did.

There are ways you can protect yourself against these things.

You can start with solid contractual agreements. The uninitiated (meaning, those who have not been burned 15 times) often choose to skip this step because they’re afraid it’ll scare away potential clients or they don’t take their work seriously enough to thing a contract is necessary.

But that’s not you, right?  If you’re ready to do this thing right, Our Deal is an amazing resource for creating, sending and signing all kinds of contracts with just a few keystrokes.

A well-thought out legal structure for your business will help too. You can ask your attorney friends what might be the right legal structure for you. There are a whole host of tempting legal shortcuts like LegalZoom, but according to the incredibly smart & beautiful Rachel Rodgers,  they don’t account for the unique nuances inherent in every business.

Rachel recommends you do the work yourself so you actually understand the process. If that’s not something you want to do, she says virtual law offices are good way to hire affordable attorneys. Just google “[your state] virtual law office” or “online law office” to find a VLO in your state.  I’d suggest checking out Rachel’s entrepreneur services as well.

Insurance is another safety net  for when relationships sour. I won’t pretend to know anything about what insurance is right for who. You could always try talking to your car or home insurance agent…but in my experience, they don’t have a clue. They maybe be able to steer you in the right direction. Luckily, the smart folks over at Solo PR Pro just posted a fantastic overview of business insurance.

Finally…and probably the most likely relationship to sour…are your personal  relationships. Starting a business is stressful. That stress will have affect your relationships & your business.

So, go in with your eyes wide open.  No wait. Better yet, make sure everyone is going in with their eyes wide open. Talk to your loved ones about your ideas & expectations and your ups & downs. Collaborate with them (if they’re interested). Ask for their buy in and they’re support.

Punching a clock is still punching a clock.

Let me start by saying almost every service-based small business has to start here. But that does not make it sustainable.

If you’re selling your time by the hour, you aren’t a business owner.

You might be able to get away with calling yourself self-employed. “Employed” as in still a wage slave.

Sure you might have a slightly cooler boss. And you’re probably charging a bit more than your earned as an employee. And you may have a little more flexiblity with your time than you did as an employee.  …but only a little more.

Taking time off for illness or for fun or for your family means you don’t get paid. There’s no vacation time. No bennies. No health care plan. If you aren’t working, you aren’t earning money.

Sure, start here if you need to…with a well thought out plan to evolve past this point.

This cannot be your long term income plan. You’ll kill yourself trying to sustain it.

 

This is also known as getting too big for your britches.

We see this happen all the time in movies.

Just imagine the scenario:

The hero programmer struggles in the beginning.  He works tirelessly and makes countless sacrifices to bring his robot software to market. When he does, he’s a star. An overnight sensation (that took 20 years of struggle to achieve).

All of a sudden, money isn’t so tight anymore, people start recognize him, experts want his opinion. And he starts acting the part, times infinity. He buys new clothes, fancy office furniture, the right car, joins the “right” clubs, eats at the “right” restaurants, gets seen at the right parties. All the while, he’s alienating the family and friends who supported him all along. And alienating his work.

It turns out the software isn’t so great and disaster is just around the corner. The robots are conspiring against us. Our cocky, over confident hero falls and falls hard.

Okay, maybe this is a bit sensationalized, but the story happens every day.

Don’t stop running the race as soon as you start to get ahead.

If you experience success (and you want it to last), pat yourself on the back and then get over yourself and get back to work.

This is such a huge challenge for new business owners.

You work so hard for that first big sale. You finally get paid…and quickly spend all of that money on household expenses like housing, food or lights.

Yes, the money is yours to spend. You earned it. But there’s a funny gray area there that suggests there should be NO GRAY AREA between your businesses accounts and your personal accounts.

First, get a bank account for your business.

You can do this with the same bank as your personal accounts to make transfers easier. Make sure every penny you earn or spend for your business goes through that account.  Don’t pay personal bills with this account.

Pay yourself…by transferring money to your personal account or writing a check to yourself if you like to go analog. And then pay your personal bills with that money from your personal account.

This is the best practice.

It’s easy to do, if you do it from the start. But once you have your accounts intermingled…it’s really, really, really hard to stop and change your behavior.

Second, don’t pay yourself every cent you earn.

Keep some money in reserves. You have expenses to cover now. Take care of the business expenses first or the business will die. And remember that you will have to pay the tax man some of that money.

If you honestly aren’t making enough money to leave some in the bank, then your business isn’t self-sustainable yet.  Don’t be discouraged though.  Just keep learning and applying what you’re learning to your business and growing.

You know what you’re good at. So, do that. Period.

Look at the menu in the picture.  It is awesomely perfectly simple. They’re good at seafood. So that’s what they do.

They didn’t add burgers to please the non-fish-eaters. They didn’t add desserts. They didn’t add chicken. It’s seafood. Period. And it’s probably AWESOME seafood. Because they’re specialists at it.

Let’s say the owner gets the brilliant idea to add burgers to the menu.

That’s going to take the kitchen’s focus from the seafood. They have to retool the kitchen. They have to  change their processes completely. And they aren’t as good at making burgers as they are seafood, so their overall quality of their menu would go down. The quality of their seafood will go down too…because they’re distracted by the struggle going on with the stupid burgers.

The whole thing would fall apart.

So….keep it simple. Know your specialty.

This isn’t going to happen overnight.

I’m sorry if that’s a shock.  Most likely, it isn’t.

But we do live in a world of instant messages, drive in lattes and streaming movies. We tend to get impatient when things don’t just fall in place.

That isn’t gonna happen here. There will be boulders to push up hills. The first products you make…no matter who you are…they’re gonna suck.

No one is great when they’re just starting out.

Let’s say, instead of starting a business, you decided you wanted to play the cello in the symphony.  So, you buy a cello, take a few lessons from a few different teachers and audition.

Would you be surprised if you didn’t get in?  No.  Because, unless you’re some kind of freakish prodigy, you’re not going to be good at this right away. Period.

Do you know how you get past that? By being bad at it. Often. Loudly and proudly.  Every time, you’ll be a little less bad until you’re good.

That’s not easy to do, but I am 99.75% certain you can do it.

Let’s talk about this!

What business mistakes did I leave out?

I’d love to know your experience with these mistakes. Have you made them? Have you seen others make them?

Let’s talk about it in the comments.

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25 Responses to Protect yourself against these six common reasons micro-businesses fail

  1. Karen Taylor January 17, 2012 at 7:49 am #

    I think this post is fabulous! I posted the link to my Twitter and FB accounts including the quote “If you’re selling your time by the hour, you aren’t a business owner.” Every micro business owner/solopreneur needs to read this.

    • LarahRitchie January 17, 2012 at 6:06 pm #

      I’m so glad you enjoyed the post Karen. 🙂 Thank you so much for reading & sharing it!

  2. Ben Gran January 17, 2012 at 1:28 pm #

    I disagree with your suggestion that people who “sell their time” as solo freelancers or consultants aren’t “business owners” and are just “wage slaves.” I wrote about this same topic re: “do you have a business, or a job?” http://www.corpnet.com/blog/starting-a-business-do-you-truly-have-a-business-or-a-job/ Personally, I think if you’re succeeding on your own terms as a freelancer, if you have a solid base of clients who pay you well, and if you’re spending your time the way you want to spend it, then WHO CARES whether or not you have a “business?” It’s just a matter of semantics. Some people prefer to work solo. Some people don’t want to grow. Sure, the idea of “passive income” and “not having to be there to make money” sounds great, but doesn’t work for 90% of business owners. Most business owners can’t let themselves take much time off from the business, or don’t want to.

    • rhiannonllewellyn January 17, 2012 at 3:22 pm #

      Ben, I think you have a point – but the target of this article is a person who DOES want something called a ‘business’, in which case the content here is pretty darn relevant.

      Assuming that people want to stay small before they understand what it can mean to be bigger does them a serious amount of harm, in my opinion.

      • LarahRitchie January 17, 2012 at 6:17 pm #

        @rhiannonllewellyn Assuming that people want to stay small before they understand what it can mean to be bigger does them a serious amount of harm.

        I couldn’t agree more. 🙂

    • Noelle Anthony January 17, 2012 at 3:32 pm #

      Ben, for what 10% of the online-business population do passive income and non-present income work? I’m interested in the studies. (If nothing else, it will help me target MY services!)

      • LarahRitchie January 17, 2012 at 6:20 pm #

        @Noelle Anthony I’m sure they’re out there somewhere, Noelle. But I don’t know where they hide either.

    • LarahRitchie January 17, 2012 at 6:16 pm #

      Hi Ben,

      You bring up an important point-of-view. In fact, it’s so important that I’ve decided to do a follow-up post based on your comment. This isn’t just the case for freelancers, but for all kinds of lifestyle businesses too. While I understand your line of reasoning, I definitely want to caution BrainyFeet readers about this wage-earner-mindset trap. Moving from a paycheck-to-paycheck situation at a job you hate and into an invoice-to-invoice situation doing work you love, is not even a lateral move. Now that all of the expenses are on your shoulders, it’s a step backwards right into dangerous, life-sucking financial quicksand.

      But there are ways to structure your business so you can avoid the quicksand. I’ll be sure to write more about that this week or next.

      Thank you so much for your comment and for keeping this important conversation going.

      ~ Larah

      • AllenSnook January 18, 2012 at 5:22 am #

        Invoice to invoice is no fun… so we are developing software products that people can buy from our site and install on their sites… the challenge is reserving time for product development and not booking every hour with a client project. I am not sure I would call it passive income as much as a kind of income on investments… and the initial effort to create the products is the initial investment.

  3. amy4leaf January 17, 2012 at 2:20 pm #

    Great post, and all things that I need to keep in mind. Mainly the separate business bank account is something I need to start using this year. It’s getting real!

    • LarahRitchie January 17, 2012 at 6:24 pm #

      @amy4leaf Yay, Amy for business banking in 2012! ProTip: Try replacing “I’m going to do that this year” with “I’m going to do that this week.” And please check in to let me know when you did it! 🙂

      • amy4leaf January 17, 2012 at 8:04 pm #

        @LarahRitchie Ooh. Going to Paris this week. It’s gonna have to wait! 😉

  4. kpdurand January 17, 2012 at 2:31 pm #

    There is so much good stuff here, I don’t even know where to start.

    I am a big believer in making sure everyone is on the same page when entering a business transaction or relationship. The real value in creating a written contract isn’t in covering your rear; it’s in clarifying what everyone expects out of the deal. A contract also gives you a roadmap for getting out of the deal, if the situation calls for it.

    The piece about opening a separate bank account is spot-on! Even in a sole proprietorship, having a separate bank account makes tracking money a lot cleaner and easier – especially when tax season rolls around.

    “This isn’t going to happen overnight.” – So simple, yet so often forgotten. Thanks for reminding me!

    • LarahRitchie January 17, 2012 at 6:27 pm #

      @kpdurand Yes! There are 1001 reasons to get your sh** in writing. It’s just an all-around good idea. It is *so hard* to be so brief about each of these topics!! I think I’ll have to blow each one up into a post of their own sooner rather than later.

      Thank you so much for stopping by Kyle!

  5. kateblessings January 17, 2012 at 3:15 pm #

    This was really good stuff – especially the part about contracts and separate bank accounts – neither of which I’d actually considered as I tend towards the ‘woowoo’ side of life – thanks for helping me see stuff I’m prone to not noticing!

    • LarahRitchie January 17, 2012 at 6:31 pm #

      @kateblessings Woo is good. You keep bringing the awesome woo, Kate and I’ll do my best to keep helping you balance the woo with some non-stuffy, un-boring business stuff.

      Plus, happy dance for the new noticing!! Remember, the smallest steps are the most important ones. And it’s all small steps.

  6. Carol Logan Newbill January 17, 2012 at 3:41 pm #

    Quote: “Most business owners can’t let themselves take much time off from the business, or don’t want to.”

    I would argue that many business owners would indeed like to take off time from the business. If you “can’t let yourself” do that, it isn’t healthy or sustainable in the long run. There is more to life than work.

    • LarahRitchie January 17, 2012 at 6:33 pm #

      Yes Carol! You want to run your business so you can live your life. You don’t want your business to run your life!

  7. Nichole January 17, 2012 at 5:11 pm #

    So, how exactly do you scale a creative business, like a design or copywriting business? That’s a problem most creative types have. Sure, you may sell a few products or training programs, but unless the training programs run themselves, you’re still pretty much doomed to having to show up to run them. Thoughts?

    • LarahRitchie January 17, 2012 at 6:36 pm #

      Nichole, your question is a lot like Ben’s below. As I mentioned in my reply to Ben, this is a huge and important point. So important that I’m going to respond fully in another blog post.

      Thank you so much for joining the conversation! I look forward to your comments on the follow-up post too. 🙂

  8. Ellie Di January 18, 2012 at 6:06 am #

    Dude. That chalkboard of seafood delights as made me hungry for lobster, and it’s just now 10am.

    I’ve been pretty watchful about falling into these traps. Probably too much, actually. I haven’t paid myself a dime of my earnings, for example, because I’m worried about taxes. On the other hand, I’m trying to gear my biz strongly towards service instead of products, so maybe I’m shooting myself in the foot there (it seemed you might be saying that being service-only is bad because if you get sick you don’t get paid).

    All tricky business, for sure. And now I’m off in search of at least some clam chowder.

    • LarahRitchie January 19, 2012 at 7:01 am #

      Oh, I know Ellie! That sign makes me hungry too!

      Service only isn’t bad at all. Tons of people have great success with service only. But take a look at pure service models that work…that scale.

      Attorneys & doctors scale because the most in demand doctors can charge a lot of money, but also because they have support staffs that handle almost all of the client interaction & all of the admin work.

      On a smaller scale, teachers and, for example, dance instructors succeed because they offer a mixture of private instruction and group instruction.

      So, the trick is to create one-to-many services or products and as soon as you can, bring in others to manage the non-core details of your day-to-day business.

      I wrote a little about this in yesterday’s post (http://brainyfeet.com/2012/01/how-to-be-self-employed-without-living-invoice-to-invoice/), but I think I’ll write another post next week with more details about the idea of one-to-many.

      Thanks so much for keeping the conversation going! ~ Larah

  9. LarahRitchie January 18, 2012 at 10:33 am #

    Alright everyone, I just posted the response post to many of the comments here: How to be self-employed without living invoice to invoice. Plus a rate setting primer. (http://brainyfeet.com/2012/01/how-to-be-self-employed-without-living-invoice-to-invoice/)

  10. AbigailPockneyGorton January 24, 2012 at 12:33 pm #

    Larah, You are writing about the “I don’t own my business, my business owns me!” phase. Hopefully it is just a phase we go through and may we all get to the other side as fast as possible. As a creative, I am SO working on not being invoice to invoice. This is a great post and I will be sharing it on my Facebook page tomorrow. Thanks!

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  1. How to be self-employed without living invoice-to-invoice. Plus a rate setting primer. | BrainyFeet - January 18, 2012

    […] what happened:  Yesterday’s post listed 6 big, business killing mistakes I really hope you don’t make, in which is introduced the idea that Unsustainable: The trap of selling your life away in hourly […]

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