Biggest Mistake That Small Business Owners Make

This material is brought to you by Michael E. Gerber’s best seller, The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It. This book has been voted #1 business book by Inc. 500 CEOs and has been endorsed by numerous high-profile businesspeople worldwide.

Did you know that approximately 20% of new businesses fail within the first two years of being open? And of that, 45% don’t make it past the first five years, and 65% during the first 10 years. That means that only 25% of all new businesses make it to 15 years or more.[1] What secret does the 25% have that the rest do not know about? First, let’s look at the top 10 causes of small business failure:

  1. No market demand: 42%
  2. Ran out of cash: 29%
  3. Not the right team: 23%
  4. Got outcompeted: 19%
  5. Pricing/Cost issues: 18%
  6. User un-friendly product: 17%
  7. Product without a business model: 17%
  8. Poor marketing: 14%
  9. Ignore customers needs & feedback: 14%
  10. Product mistimed: 13%

That was a specific list of reasons, but they all ultimately funnel into one main mistake made by the owner. The E Myth—which has been credited as one of the most valuable books for small business owners, talks about this miraculous solution overlooked by millions of small business owners every year.

Applications for New Businesses in 3rd Quarter of 2020 are the highest on record (since 2004:3) for quarterly series for both likely employers and non-employers. See new release from U.S. Census Bureau

As Covid spurs the highest jobless rate since the Great Depression, the opposite is happening with the number of registered businesses. A boom in entrepreneurship and new business formations of all sizes are up 82% from a year ago. Suppose you are or plan to be one of these new businesses. In that case, you must understand the following to give your business a better chance to thrive in today’s competitive economy.

Owning a Job V.S. Owning a Business:

Most new businesses are not started by Entrepreneurs who set out to build a strong business but by technicians who enjoy the hands-on work themselves. Because of that natural bias, most business owners focus on working in their business when really they should be working on their business.

The Technician who runs the company doesn’t want growth or change, but precisely the opposite. He wants a place to go to work, free to do what he wants, when he wants, free from the constraints of working for the boss. Unfortunately, what The Technician wants, dooms his business before it even begins.

A technician seen working in the business

Instead of looking at the business as a one-off operation, the owner should view the business as a prototype for many franchises that will be opened at a later stage. By adopting that mindset, the business owner will not only participate in the business as a technician but also act as a Manager (putting systems in place and controls) AND as an Entrepreneur (having a vision of how the business can create sustainable added-value for all key stakeholders).

A business built and managed by someone who combines the Technician, Manager, and Entrepreneur approach will have a far greater chance of future success than one guided by someone thinking like a technician alone.

There are 3 personalities in a small business:

  1. The Technician is the person with the “”If you want it done right, do it yourself” credo. Thinking isn’t working; the Technician loves to tinker and get things done. He loves the feel of things and the fact that things can get done.
  2. The Entrepreneur is the visionary, dreamer, in us. He is the catalyst for change. He lives in the future, never in the past, and rarely in the present. He’s happiest when left free to construct images of “what-if” and “if-when.” In science, the entrepreneurial personality works in the most abstract and least pragmatic areas. In business, he is the innovator, the grand strategist, the creator of new methods for penetrating or creating new markets. It is our creative personality—always at its best dealing with the unknown, prodding the future, inventing probabilities out of possibilities, engineering chaos into harmony.
  3. The Manager is pragmatic. Without The Manager, there would be no planning, no order, no predictability. If The Entrepreneur lives in the future, The Manager lives in the past. Where The Entrepreneur craves control, The Manager craves order. Where The Entrepreneur thrives on change, The Manager compulsively clings to the status quo. Where The Entrepreneur invariably sees the opportunity in events, The Manager consistently sees the problems. The Manager creates neat, orderly rows of things. The Entrepreneur creates the things The Manager puts in rows. The Manager is the one who runs after The Entrepreneur to clean up the mess. Without The Entrepreneur, there would be no mess to clean up. Without The Manager, there could be no business, no society. Without The Entrepreneur, there would be no innovation. The tension between The Entrepreneur’s vision and The Manager’s pragmatism creates the synthesis from which all great works are born.

Most new businesses are started by technicians—people who are skilled at what they enjoy doing. Technicians start a business assuming they understand the logistics and technical aspects of a business but quickly realize they don’t. Building a business requires the founder to encompass all three skillsets (Technician, Entrepreneur, Manager).

Once a business is started, it goes through three critical phases of growth:

  1. Infancy: In this stage, businesses that fail are often operated according to what the owner wants instead of what the business needs. The Technician who runs the company is not looking for growth or change, but for a space to work with no constraints from a boss. As time passes and the company starts getting 100+ customers a day, the Technician quickly realizes that the business must change to survive. He simply cannot handle the bookkeeping, product development, manufacturing, marketing, cleaning, and everything else that needs to be done—all by himself. Being a technician is only a problem when it consumes all other work in the business to where he cannot focus on growing it.
  2. Adolescence: This stage begins when you decide to get some help. This can happen either right away or months after opening, but it always happens due to a crisis in the Infancy stage. Every successful small business must graduate to the adolescence stage. The help needed in this stage is technical help—people who are experienced in your kind of business who can fill in to do the work you don’t like. A bookkeeper is also almost always hired at this stage.
  3. Maturity: A Mature business knows how it got to be where it is and what it must do to get where it wants to go. These are the Fortune 500 companies that have already solidified a position in their industry. Maturity is not an inevitable result of the first two phases. It’s not the end product of a serial process, from infancy through adolescence. Mature companies like McDonald’s, FedEx, and Disney didn’t end up as Mature companies; rather, they started as one. A person who begins as a mature company must pass through infancy and adolescence; however, he does so with a different perspective—his entrepreneurial perspective.

Tom Watson, the founder of IBM, attributed his success of the company to starting as a mature company:

“IBM is what it is today for three special reasons. The first reason is that, at the very beginning, I had a very clear picture of what the company would look like when it was finally done. You might say I had a model in my mind of what it would look like when the dream—my vision—was in place. The second reason was that once I had that picture, I then asked myself how a company which looked like that would have to act. I then created a picture of how IBM would act when it was finally done. The third reason IBM has been so successful was that once I had a picture of how IBM would look when the dream was in place and how such a company would have to act, I then realized that, unless we began to act that way from the very beginning, we would never get there. In other words, I realized that for IBM to become a great company it would have to act like a great company long before it ever became one. From the very outset, IBM was fashioned after the template of my vision. And each and every day we attempted to model the company after that template. At the end of each day, we asked ourselves how well we did, discovered the disparity between where we were and where we had committed ourselves to be, and, at the start of the following day, set out to make up for the difference. Every day at IBM was a day devoted to business development, not doing business. We didn’t do business at IBM, we built one.”

The entrepreneurial perspective views the business as a network of seamlessly integrated components, each contributing to some larger pattern that comes together in such a way as to produce a precisely planned result—a systematic way of doing business. Each step in developing such a business is measurable—if not quantitatively, then at least qualitatively. There’s a standard for the business, a form, a way of being that can be translated into things to do today that best exemplifies it. The business operates according to articulated rules and principles. It has a clear, recognizable form.

The entrepreneurial model (AKA Turn-Key or Franchise Model) views your operation as the prototype that a large number of franchise or turn-key operations will later duplicate. The challenge then becomes to maximize the amount of time you spend working on your business rather than in your business. As the Entrepreneur, you create and perfect the system that runs the business, and the people run the system. In the franchise prototype, the system transforms the business into a machine driven by the integrity of its parts, all working in concert toward a realized objective.

As depicted in the movie “The Founder”, McDonald’s original founders developing their franchise model so it can easily be duplicated and run with minimal oversight from the entrepreneur

The bottom line is that most small businesses fail because a technician starts his own business without adapting the Entrepreneur and manager personalities, hence stunting his progression through the 3 stages a business must pass through. They fail because they work in their business instead of on their business. Turn your business into a fine machine (using the franchise model) where each position understands their role, and each part is replaceable for the most part.

To read more about how small businesses succeed, I highly recommend reading The E-myth Revisited. It is arguably the best book for all small business owners.