When first striking out as a leader you have no followers. Leaders need people. People are the life blood of teams, companies and every great nation. The resource of human capital is potentially unlimited. It is natural to appreciate your first follower. When there is no army standing behind you the situation is direct. When someone elects to stand shoulder to shoulder in spite of the dire situation the affects can be riveting.
What happens when others begin to follow?
What happens when belief and support are no longer enough?
What happens when skill, ability and craft are required to move forward?
The first venture I did was a lawn care company. The company was called E&D Services. It was an unincorporated partnership (D/b/a or “Doing Business As”) back in 2006. The “E” stood for one of my brother’s best friends. The “D” stood for my close family member and best friend at the time. These two are some of the most loyal people I know. These people are individuals who will not betray you for any reason. These same loyal individuals had limited business skills at the time. To be fair I had limited business skills; however, I did not lack entrepreneurial instinct.
I successfully landed three commercial contracts and a number of residential contracts. The total contract values tallied up to about $150,000. I utilized my first real estate flip (done with one of my older brothers) of $15,000 to start the business.
The business inevitably failed.
The business failed due to certain pitfalls. I encourage all prudent aspiring entrepreneurs to heed these pitfalls. These pitfalls I detail into six (6) characteristics. These pitfalls deal with avoiding certain character traits when choosing partners. It is imperative you correctly identify these characteristics in anticipated ventures.
These characteristics translate into common situations inherent in business failures.
1) Large Capital Expenditures Prior to Revenue (Characteristic: Spender not Investor). In my amateur assumptions I elected to spend nearly $12,000 on equipment. I deployed this capital before having any customers, revenue, or marketing plan. The main proponents of these items were my partners. Instead of leasing I purchased.
2) Lack of Working Capital (Characteristic: Non Planner). With all capital spent primarily on acquiring assets we lacked sufficient capital to carry out necessary day to day operations. No person took up the mantle of making a written plan.
3) Lack of Industry Knowledge (Characteristic: Ignorant). With all capital spent primarily on acquiring assets we lacked sufficient capital to carry on until payment. Commercial Contracts could not be fulfilled due to lack of money required to simply go to pay day. In lawn care all commercial contracts (residential expects as well) pay net 30 to net 90. We did not know this.
4) Lack of Skilled Workers (Characteristic: Amateur / NonProfessional). Given we were all new we devalued commercial landscaping is a profession. The quality needed to satisfy large corporate clients went beyond “Cutting Grass” and “Weed Wacking”. Most large corporate clients wanted “Landscaping”. We failed to recruit proper skilled persons. My partners were not skilled landscapers.
5) Lack of Solvent Financial Partners (Characteristic: Unaccredited). Given I was new the entire business depended on my one time investment of $15,000. No other financial contributions were given or anticipated. This was not due to greed or selfishness. This was due to inability. I was unable to attract further partners because my existing partners would not dilute themselves. Their “sweat equity” was too valuable and they would not make room for others. We all lacked sufficient net worth.
6) Partners who Required Paychecks (Characteristic: Financially Unstable). The biggest mistake is the last one. The people I recruited were employees. These individuals needed paychecks and expected me to provide them. Regardless of whether sales existed or not. No savings existed to run a 12 month stint to let the business mature. My partners had no money saved when I selected them. In fairness I knew this and still solicited the arrangement.
Let’s analyze components for Free Loader(s). Remember a Free Loader can be a wonderful individual. These people can be your best friend. We are characterizing the Free Loader from business prospective only (not a personal one). A Free Loader is characterized as a person who is 1) Financially Unstable, 2) Is an Unaccredited Investor, 3) Is Amateur (Non Professional), 4) Ignorant of Industry, 5) Does not Compose any Planning Documents, and 6) Spends others money (does not contribute their capital).
Stay away from Free Loaders. These individuals will destroy your business and any professional endeavor you undertake.
Let’s proceed to intermediaries. Intermediaries are individuals who can be 1) Financially Stable, 2) Accredited Investors, and 3) Professionals. Sometimes intermediaries are knowledgeable about industry and not ignorant. The difference between an Intermediary, Stakeholder and Partner comes down to simple dynamics. Does the person assist in the planning phase? Will the person invest their own money? Will the person work in the business if no employees are available? If the answer is no to all of these questions then the person is an Intermediary. Intermediaries can be important. Do not devalue the services these individuals provide. Just be sure not to over value. Do not over pay intermediaries. Typically Intermediaries do not work in or on your business. The quality of the Intermediary is determined by 1) relationship with who you need to do business with and 2) knowledge of the industry.
A Stakeholder is someone that earns a stake in your project. Notice the word “earns”. Stakeholders are 1) Financially Stable, 2) Accredited Investors, 3) Professionals and 4) Knowledgeable. The Stakeholder earns their place by providing an integral part of your business (such as business plan, valuation, offering memorandum, listing service, accounting, board of advisor / director, et cetera). The Stakeholder is always part of your planning process. The Stakeholder does everything but invest their capital. The Stakeholder works on your business. The Stakeholder does not work in your business.
A Partner is someone that is your equal. This individual is all of the above and will shoulder whatever cost you incur proportionate to their interest. These individuals will actively help you. These individuals will work in the business (not just on the business). A person who only works on the business is a Stakeholder not a Partner. Your partner is prepared to scrub the tile floor of your nail salon if you need them to. Your stakeholder will recommend it be taken care of. There is a difference.
In my first endeavor I ignorantly staffed Free Loaders and Intermediaries in my business. I called these people “Partners”. There are other components to business failures not just improper staffing. Personally the ones I have the worst results with consist of placing people in positions they were unqualified for. Remember, the leader empowers people.
Do not empower Free Loaders to Partnership. Do not devalue Partners to Stakeholders. Do not insult Stakeholders by paying them Intermediary rates. Know how to manage each type of person. Each one has a place. The Free Loader might be your Public Relations person you take out to parties. You pay their bill and that’s their compensation. I know plenty of those in business. They are wonderful at “Relationship Building”. Relationship Building is worth a dinner bill with drinks on you. Don’t forget it. Learn the difference between Free Loader, Intermediary, Stakeholder and Partner. Treat each one as they should.
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com