Book Summary – Mistakes Millionaires Make (Lessons from 30 Successful Entrepreneurs)
Some of the common blunders millionaire entrepreneurs make stem from the nature of the personality of the typical small-business owner. Entrepreneurs, by definition, believe in their own abilities and have the willpower to take risks and even gamble. When entrepreneurs with these qualities tackle projects during a favorable period in the general business environment, “überoptimism” can take over. Self-made millionaires may underappreciate the factors of luck and a general boom in their relevant economic sector. Pride can leave them vulnerable to a fall. Bankruptcy lawyer Bill Lobel warns against “debtor syndrome,” when “you can’t see the downside risk because you are so optimistic that something around the corner will take you over the hump.”
“Even though an entrepreneur has been successful with a first company, it’s less likely that the second company will follow suit.”
To compensate for this understandable confidence and the momentum of good times, an entrepreneur should, “when the company is big enough, hire the best CFO feasible.” Successful entrepreneurs often have a weakness in this area of their organizations. They tend to ignore any voice of financial conservatism. The entrepreneur figurehead’s appealing, positive powers drown out any leveling messages. Companies often require a tough financial manager, even if he or she ruffles feathers and spoils team harmony.
“All the really big downfalls I’ve had somehow involved lawyers and a feeling that they’re going to fight until everything is gone.”
Entrepreneurs may end up in financial trouble due to a lack of conservative fiscal expertise in their firms. In a fast-growing, exciting business, nobody wants a doom-spouting CFO telling everyone things aren’t possible and holding back apparent progress. However, “tough demanding types have a purpose, especially when things get rough.” The CFO of a dynamic business should not act “as a controller” or keep track of the accounts. He or she should be “in front telling the firm what needs to happen.” If you’re fighting for survival and lack an effective CFO, hire a tough “turnaround manager” to make the hard decisions and layoffs you may not want to execute.
Entrepreneurs’ optimistic natures can lead them to be too trusting. They get into trouble in hard times when heartless contracts and detailed legal proceedings replace assumed personal understandings. A big-picture entrepreneur may pay less attention to completing unglamorous and tedious due diligence investigations. Take care to compensate for this weakness when selecting members of your senior team. Mergers and acquisitions are a particularly lethal area: Hubris, optimism and weak due diligence can undermine even the most successful person, since most mergers and acquisitions fail to live up to expectations.
Entrepreneurs “tend not to be entirely transparent, because they feel that those around them might see chinks in their armor.”
Stories abound of millionaire business owners losing fortunes by betting on a final gamble for survival when they should have thrown in the towel, or by chasing a bold acquisition that stretches the finances of their organization right as the economy turns against them. Recognize your predilections as a risk-taking entrepreneur; employ top financial people and listen to them.
“It is very common for entrepreneurs not to have qualified financial staff or, commonly, to disregard the advice given to them. These are frequently fatal flaws.”
Many victims of business reversals comment on how quickly things can turn bad. A bit of leverage and risk taking in good times can seem like par for the course, but these choices can become a fatal weakness when a crisis strikes. Many of the entrepreneurs who were damaged most dramatically during the 2008 crisis dealt in real estate, where the depth of the market shift and the leveraged nature of the industry produced exceptional losses.
As an entrepreneur, try to appreciate to what extent your business could conceivably fall victim to such extreme change. Business models based on large projects or those that have only a few main customers prove more vulnerable. To reduce the risk of an existential threat, consider moving toward a recurring-revenue model or diversifying your customer base.
“The one thing I did do in the recessions…I brought in a very cold-blooded turnaround manager…He had the guts to lay off a lot of people when I couldn’t.”
Following the most obvious market opportunities can be too easy and can leave an entrepreneur with a business model that is profitable for now but that harbors large risks. Sometimes, businesspeople need to look beyond profitability and consider a more resilient business plan that is less likely to fall victim to a random event or market shift. When money is tight, don’t skimp in areas like insurance. A lack of coverage can leave you personally liable if a downturn occurs. The importance of liquidity and cash flow is a common theme in crisis stories. Overextending leads to a lack of cash and exposes otherwise viable businesses to creditors and bankers’ whims, just when the business owner most needs independence. The entrepreneurial mind-set calls for keeping every penny working, but money set safely aside may be the best investment of all.
“You might be tempted to think, ‘Why should I have investors? I have $10 million in the bank! I made it myself the first time.’ Don’t go there!”
How to Cope in a Crisis
Going from being a successful entrepreneur to a struggling or bankrupt one is an unbelievable strain. Many who experience this trauma have found that physical activity, such as working out, yoga or running, helps relieve the stress. Focusing on something outside of business, such as family, hobbies or religion, can help you make it through difficult times. Financial problems have a tremendous impact on an entrepreneur’s spouse and children. Financial troubles often lead to divorce. Entrepreneurs grow accustomed to huge levels of stress, but they often don’t appreciate how much those around them suffer. Building products CEO Matt Hagen remembers having to explain his company’s decline to his family at Thanksgiving dinner in 2008. “My dad said to me, ‘You need to explain to everybody why this is all going away and what we’re going to do.’…Everybody’s face was pale. It was a terrible Thanksgiving.” The business survived in the end, but the family sold its personal assets and leveraged his father’s dream retirement home.
Another less understood negative experience is the loss of purpose and adrenaline an entrepreneur experiences when he or she loses – or even sells – a business. Although many would envy the problem of excess leisure, successful businesspeople often find – even in a wealthy retirement – that it is better to be working in hopes of success than to achieve it and come to a halt. Telecom business leader Alejandro Rivas Micoud steered his company through dramatic ups and downs before he hit his ultimate success, a $27 million deal, only to find that he was not ready. “I went into a deep depression…I went off the rails. The conclusion I’ve drawn is that true happiness involves three things: something to do, someone to love and something to hope for.”
“Manage your risk exposure.”
Government, Banks and Lawyers
Many entrepreneurs have surprisingly adverse experiences dealing with different branches of government. The good relationship you thought you had with a regulator can vanish quickly if the situation changes. Government employees who feel slighted can hold grudges and use their seemingly limitless resources to take a conflict further than any pragmatic business enemy ever would. A scary factor in conflicts with state entities is that one branch of government can influence another to turn its power on you. And, most people believe that if a government agency takes a stand, it must be in the right, even if it is not.
“If you’re working in a regulated industry, you have no friends in government…if an adverse situation arises and positions harden, things can become surreal.”
When a business fails, lenders lose confidence about being paid back. Once you lose lender confidence or liquidity, your power over your business can drain away quickly. You may find your banking relationship swiftly transferred from the understanding local bank manager – with whom you had good rapport – to the ice-cold regional “workout group.”
Don’t think your carefully crafted personal connections with local bankers carry much meaning. When the numbers change, some higher power in the bank’s hierarchy will demand that the institution do all it can to get back its money. Forget history, relationships, local business your family banked with for generations – just understand the small print behind your fiscal interactions. What guarantees are you liable for? Can they seize your personal assets? When will they stop? If you got risky “mezzanine finance” in good times, you might regret it in bad times.
“Typically, entrepreneurs, who are conditioned to the daily stress, strain and uncertainty of leading a business, are not empathetic toward spouses, families and friends.”
The best approach is to take on – in good times – as little personal liability and as few personal guarantees as possible. When things turn bad, be honest and open. If banks have lost money because of your business, make sure the bank managers can see that you’ve severely trimmed your lifestyle. Being truthful about your weakness and failure is important, though that’s usually hard for self-made entrepreneurs, who are typically proud, naturally private (even secretive) people who don’t want to show the “chinks in their armor.”
“No matter how good a company or individuals believe themselves to be, half of all decisions made each and every day are wrong.”
Be upfront and transparent with banks. You will want to deal with banks again in your next venture. You’d like your bankers to say, “That was a bad situation,” but he or she “handled it in a stand-up fashion.” Often it works in your favor to agree to “an early judgment with low monthly payments for a long term.” Your bank officials get the immediate headline victory. Later, you can usually renegotiate quietly to pay back a lot less after everyone involved in your crisis has moved on.
A business failure usually involves lawyers disputing who gets what. When times are good, entrepreneurs can feel that their customers are on their side. But things turn nasty quickly when a business hits trouble. Lawyers scrutinizing contracts replace cozy relationships. “The more assets there are in an estate, the more any fight turns into a feeding frenzy for attorneys.” Hiring good legal minds to help you survive or to wind up your business properly is an expensive necessity.
“All enterprises and entrepreneurs are subject to wild card events that make them susceptible to financial disaster.”
Protecting Your Wealth
When you are a millionaire entrepreneur, you’ll get swept up in the success of your business. You’ll want to keep your wealth growing, even if you only use it in the form of personal guarantees. It is also typical that, during hard times, you want the freedom to plug the holes of your sinking ship with your personal wealth. You believe in your business and in your ability to ride out a storm. However, those who have been through financial upheaval regret not setting aside a portion of their wealth beyond the reach of personal guarantees or business creditors. Protect your personal assets before doing so becomes necessary. Unfortunately, if your business is failing, your last portion of personal wealth probably won’t be enough to save it. You can easily lose everything. Entrepreneurs should set aside enough “to enable them to live at their basic quality of life in case everything goes to hell.”
“If you are leveraged enough to need mezzanine financing, perhaps you shouldn’t do the deal. What is your exit strategy from the debt? If it requires optimism, be exceptionally careful.”
Don’t assume you can ride out any financial storm or that you can make it big again so easily with your next investment. Diversify your assets, especially after a big payday like a sale or IPO. If you start a new venture, invest only part of your nest egg and keep the rest diversified. Having other investors looking over your shoulder will probably improve your game anyway.
Always be leery of using personal guarantees, especially in areas like real estate that have a history of bubbles and busts. “I’d never again sign a guarantee for a nonrevenue-generating asset, such as raw land. I just wouldn’t do it,” one busted millionaire vowed.
“When starting up a new company, include outside investors. Use other people’s money. If you are held accountable, you will better your performance and raise the bar.”
If you set money aside, a time might come when not having all your assets free to back up a deal will tie your hands. Entrepreneurs’ experiences prove the merit of securing separate funds. Don’t worry that banks and other outsiders will disapprove of your asset protections. Bankers like to see your “pain” in terms of lifestyle if you lose their money, but most consider a certain amount of asset protection sensible. Richard, an anonymous Southern California homebuilder, told his creditors, “I have to have enough working capital for 18 months. I need to reserve those funds. I made the money a sacred cow, saying, ‘You’re not touching that. You want to fight? We’ll fight, okay?’”
Employ an asset protection expert in the good times, before you place assets at risk. If hard times are approaching, learn how trouble works. For example, figure out the mechanics of bankruptcy. You don’t want to regret being the entrepreneur “who didn’t cash in his chips when he had a big stack in front of him.”