AVOIDING THE TRAPS AND PITFALLS
of Being an Owner-Operated Business
by Joelle Steele
Being one's own boss is one of the primary reasons many people start their own businesses. But, during the initial stages of self-employment many entrepreneurs find themselves in a bit of a dilemma: they have to be entirely self-motivated and make most of their decisions alone. For some this is sheer heaven on earth. To others it is more like the kiss of death.
When you're an owner-operator you exercise complete control over every aspect of your business. You are 100 percent responsible for its success or failure. This can be an advantage or a disadvantage depending on your personality, knowledge, and experience. If you are an excellent technician and a competent businessperson who personally performs every task with the utmost efficiency, your venture will likely grow and become successful. However, if you are trained or qualified in only certain aspects of the business and are either unwilling or unable to obtain outside guidance and assistance to complete the remaining tasks, you may be courting a slow and miserable failure.
The following are some of the traps and pitfalls commonly found in owner-operator businesses and what you can do to avoid or solve them.
LACK OF STRUCTURE
The single greatest necessity of any business, regardless of size, is structure. But, for owner-operators it is one of the most difficult things to achieve, particularly since it is so often misunderstood. Structure (frequently perceived as a complex bureaucracy bound together by large masses of red tape) is really just the foundation and framework which holds a company together and allows it to function at peak efficiency. Items which form some of the basic framework for running a business include office and service schedules and systems, manuals, price lists, sales and marketing plans and methods, inventory and purchasing practices, and a host of other basic concepts and procedures.
The resistance to structure by many owner-operators and small business entrepreneurs stems from their unpleasant associations with corporate bureaucracies in which the very word "structure" is associated with a business that is "rigid" and "complicated." But, those definitions apply only to the manner in which a particular structure happens to be created, not to structures in general.
Another reason why some owner-operators find structure difficult to create is because many of them left large corporations to avoid these red tape bureaucracies. It is understandable if they may not wish to go out and start one of their own. In fact, it is not even unusual for an owner-operator to go out of his or her own way to avoid such a possibility. And that is usually where this problem begins.
Lack of structure is intimately tied in with the owner-operator's desire for freedom. One of the personality characteristics which almost all entrepreneurs hold in common is their desire to do things their own way, in their own good time, with no one around hovering over them telling them to do any differently. This is great as long as the owner-operator does not get so carried away by his or her new-found freedom that the solid business basics are ignored at the eventual expense of the individual, the business, or both.
My first business consultation to the landscape trade came in the form of a former interior landscape supervisor named Jack. He had spent four years working for one of southern California's largest horticultural service companies and had borrowed money from his parents to start his own business two years before I met him. Being an outgoing person, Jack had no difficulty finding new clients through his very large network of personal acquaintances. He called me to help him handle two glaring problems: his irregular IRS return which was being audited, and his inability to schedule any time off aside from an occasional weekend.
Like many owner-operators, Jack had immediately plunged right into the thick of things without putting any thought into the structure his business would need. He did not write any kind of business plan, formal or otherwise. He assumed that if he was making money and supporting himself he didn't need one. He never thought about the day-to-day nuts and bolts of his future business. Consequently, two years later, he had a makeshift bookkeeping system that was completely unsuited to any business, he had failed to learn about business taxes himself and had not hired anyone to advise him, and, last but not least, he was burned out and desperate for a vacation with no means to schedule it and no budget for anyone to fill in for him.
Most structure begins with the inception of the business plan. Within that plan are all the financial details associated with the start up and running of the business. To avoid falling into the lack-of-structure trap, owner-operators should carefully assemble a business plan before they decide to take the plunge. If they are already in business without one, they should write one after the fact. It is never too late and you can't do it soon enough to prevent future problems.
LACK OF DISCIPLINE
Lack of discipline is the love of freedom taken to extremes. It is found with the owner-operator who is either reveling in the aforementioned lack of structure, or is pretty much ignoring whatever structure does exist. Lack of discipline coupled with lack of structure makes for a one-person enterprise that is incapable of profit or growth.
My good friend Gina started saving to start an interior landscape company and finally did so 1984 after twelve years in the corporate world. She loved her freedom from the watchful eyes of an oppressive manager and was delighted to be out of the 9-to-5 routine. On the surface she did everything right: she bought her brother's van, rented a two-car garage, purchased all the necessary office and horticultural equipment and supplies, established an efficient record-keeping system, hired a lawyer to draw up her contracts, had her cards and letterhead professionally designed, installed a second phone line in her home, got a post office box, etc.
After less than one year, Gina was ready to call it quits. She had no problem getting clients — if she could only make the appointments on time and deliver her proposals on schedule. She had no problem doing the design, installation, or maintenance — if she could only get them done in accordance with the clients' needs. Gina's client turnover rate was more than 50 percent. She knew something was wrong but she couldn't figure out what it was.
When Gina called me I reiterated that this was a fast-paced business that required a high degree of organizational ability. She argued that she was a hard worker and was very efficient. But, after I questioned her further, she admitted that she adhered to no set plan or schedule for anything. She performed her maintenance "more or less on the same day each week" and started her day "whenever I get up." Several months later after she was on a daily schedule, she admitted that prior to getting on that regular routine, she had frequently had to cancel estimates and installations because she had gotten behind on her accounts or had a client complaint which had to be attended to before anything else.
To avoid the lack-of-discipline trap, buy a very big daily calendar. Use it diligently. Carefully schedule your service and your appointments, as well as all the daily, weekly, and monthly tasks demanded of a business- person. Do not forget to include your teeth cleaning appointments, your son's Little League games, and, of course, regular vacations. You'll be less likely to take time off indiscriminately if you plan everything in advance. Week-long vacations should ideally include a few three-day weekends in between. If everything is on the calendar, you can visually see what needs to be done and do it. And, if you are a hardcore procrastinator, work at overcoming it or consider another line of work. Being your own boss takes more than the average amount of discipline.
LACK OF BUDGET
All that money! Being self-employed is just great! Instead of making $10.00 per hour you make $25.00, maybe $45.00, or even $60.00 per hour. Kind of reminds you of Scarlett O'Hara in "Gone With The Wind" vowing she'll never be hungry again. And if she was making that kind of money after years of scrimping and struggling to get by, she would probably be overwhelmed by her sudden wealth.
Gary grossed $68,000 his first year in business. He had only twelve hours of maintenance per week but he had eight installations that year. He called me when he found that he had a taxable income of $13,000 and had to pay a total of $6,500 to cover his state and federal income tax and the Los Angeles County business tax.
What Gary didn't realize was that while money was going in and out of the checking account and his bills were always being paid on time, he had never established any budgets and had created his price structure "out of my head." As a result he had not made enough money to set aside for personal savings and he was unaware that he needed to make estimated tax payments. By the time Gary paid his various taxes six months later, he had accrued penalties and interest of over $1,800. It took him another year to get his budgets and pricing to work properly so that he could keep up with his real expenses and still have something left over for himself.
Another individual who fell into the lack-of-budget trap was a former secretary named Holly. Like Gary she had never established budgets. But, she was technically making more than enough money to meet all her required expenses and then some. Holly simply got carried away having so much money at her disposal. Instead of taking a fixed draw from her income, Holly spent whatever was in the checking account whenever she felt like it. At the end of her second year in business Holly had bought a closetful of clothes and a BMW. She had moved from a very nice apartment to an equally nice but much more expensive duplex. When I met her, she was frantically trying to sell her business assets to pay off her two city business licenses which were in arrears with penalties and interest to the tune of $26,000. Her bank account had already been liened by the IRS the previous year which was why she was behind in the city licenses. Her liability insurance had been cancelled due to non-payment. Holly had been drawing over $4,000 per month from a business income which justified only about $2,400.
The lack-of-budget trap is the hardest one from which to escape. To avoid it in the first place do the following: 1) hire a good bookkeeper or an accountant to help you establish budgets for everything and to create your pricing structure, and, 2) stick to the budgets.
WEARING TOO MANY HATS
Owner-operators wear many hats. The more complex your business, the more varied the headwear. In any given week, an interior landscaper has the potential to make hat changes from technician to salesperson to designer to collection agent to file clerk to who knows what else. One common problem that affects almost all owner-operators is that we are simply not qualified to wear most of those hats in the first place. After all, how many of us are fully competent at everything? At best we may be highly skilled in a couple areas and marginally capable in a few others.
No two interior landscapers have the same degree of competency in any specific aspect of the business. I have met many highly skilled horticulturists who are wholly incapable of handling even the easiest of sales presentations and I have met some very talented designers who do the majority of their recordkeeping on the backs of napkins and matchbook covers.
Individuals who try to "do it all" themselves are usually looking at a much limited period of success followed by an even swifter decline. The very nature of trying to do so many things is a path to failure when those things we're not so good at start to catch up with us. But, what can be even worse is the stress and anxiety that comes from trying to fill so many different roles.
Mark is a former owner-operator whose interior landscape company has 300 clients and 11 full-time employees. This is Mark's second interior landscape company. The first, while he was an owner-operator, failed after two years when he was forced to quit due to an ulcer which his doctor said was made worse by Mark's stressful business life. Mark refused outside services, instead preferring to rely on himself to "do everything and do it right." He worked 60-hour weeks during which he accomplished things that could have been done in half the time by a qualified expert.
Mark admits to learning best in the school of hard knocks. Unfortunately, so do I. But, it's a crushing experience you may wish to avoid. So, as a rule of thumb, unless you are an expert quick-change artist with limitless capabilities, you should take steps to find the right help to keep your business, and you, on track. Admit your weaknesses and find outside services to handle those things at which you do not excel or for which you do not have sufficient time.
It's dirty job but somebody's gotta do it. No, I don't mean grooming plants or transplanting. But, every company has those jobs that almost no one ever wants and which few are even qualified to perform in the first place. Take collections. How many people really want to get on the phone and try to get money out of their deadbeat clients? How many actually know how to get the money without losing the client in the first place? And, how about tax time? How many hours did you spend burning the midnight oil trying to decipher your own notes as well as the IRS instructions?
There is always going to be at least one area of the business that an owner-operator simply despises; that one task that always gets put at the bottom of the "to do" list. I'm not talking about a chore that is just kind of a nuisance. I'm referring to certain things, important things, which must be done and which you always avoid. If you have such obligations it may be in your best interests to find someone to do them for you. This is particularly true if in addition to disliking the activity you do not do it all that well either. There are people out there, some who are other owner-operators like yourself, who actually love to do the very things you hate. Find these people. Hire them. Get the job done so that you can get on with the things you do best and the things you enjoy.
All owner/operators are at financial risk if they suddenly become ill, especially if they become seriously or chronically sick. Speaking from experience, I am well aware of the dramatic impact that major illness can have on a person's life and cash flow. But, I was home-based and making my living at my computer terminal — a relatively slow-paced lifestyle that did not make physical demands on me. When I was having one of my less than healthy days, I could still manage to bang out a few words on the keyboard and reduce my risk of financial loss.
Interior landscapers, on the other hand, do not have it so easy. Nowhere is the risk of illness greater than in the interior landscape trade where the owner-as-technician is subject to potential sickness or disability from labor-related injuries or even chemical exposure. If we include the liability for accidents as a result of such extensive vehicle usage, that risk becomes even greater. And, what happens to the business if an owner-operator gets sick?
Heidi was a co-worker of mine in my days with an interior/exterior landscape company. She moved to Texas and started her own interior landscape business which went well for a number of years. She was financially successful and had recently bought a house when we ran into each other at an industry show. When I saw Heidi at the show she was on crutches, recovering from extensive surgery to her right leg which had been crushed in an auto accident that occurred during the course of her service route.
One year later, Heidi was out of business, had rented out her house, and was temporarily living with her parents following a third leg surgery after which she was not allowed to walk for three months. She had tried to make a go of her business but she had already been unable to drive for almost a year and had lost all but three of her clients during the first six months following the accident.
Heidi was luckier than many, however, because she had been wise enough to plan for the worst case scenario. She was loaded with insurance. She had an individual disability insurance policy, major medical and life insurance, and a comprehensive automobile insurance policy — all with maximum coverage that had been in place since she first started her business. She did not lose anything but her clients. All her hard assets, personal and business, were intact.
Just because you are living a charmed life right now doesn't mean you will live happily ever after. Hopefully you will. But, if you should have the misfortune of having your health impaired in any way, take a tip from Heidi who has since fully recovered and gone on to own a retail garden center: invest in sufficient insurance to cover anything that may happen.
Another tip (this one from me), make friends with other owner-operators in your area. Establish a reciprocal agreement to fill in for one another if push comes to shove. Do not make the mistake of assuming that everyone is unethical enough to "steal" your business in the face of disaster. There are still many professionals who understand the value of trust in a business relationship.
There may come a time when you decide to seek out employees, to explore new sales territories, to boldly go where ... well, you get the picture. You want to expand. But, owner-operators often find themselves caught in the expansion trap without enough money to hire an employee and maintenance rates too low to support one to tend the older (translation: "underbid") accounts.
When Bob decided to buy a nursery he started searching for a technician to take over his maintenance route. He had been wanting the nursery for two years but continued bidding his maintenance according to what he thought was a competitive rate, with no regard for the costs that come with hiring an employee. He calculated like this: "I figured that with an hourly wage, taxes, and reimbursement for mileage that I would still net $16.00 per maintenance hour."
Bob never realized that employees do not always work with the same dedication and efficiency that an owner-operator does. He didn't consider the possibility of excessive plant losses. He also did not know how to interview, train, or manage people. His experiences having employees were unproductive at best. He ended up losing most of his accounts the first year that he owned the nursery but was fortunate enough to learn what he needed to in order to start up an interior landscape service again a few years later. He has been successful in that venture primarily due to his new-found ability to delegate.
It is sometimes too late in the game to make any sudden changes that will have an immediate impact on an overnight expansion plan. To avoid falling into the expansion trap, consider all your options when you first start your business. Just because you want to be a lone wolf without employees doesn't mean you will want that same scenario two, five, or even ten years down the line. If you price your services only to maintain yourself without saving for the business, you may not be able to grow if or when you decide you want to.
There is not a month goes by that some owner-operator doesn't call or write asking me for advice on how to sell their business. In the great majority of cases, they have no business to sell because they are the business.
A couple years ago an interior landscaper visiting the TPIE conference in Florida told me that he had been trying to sell his business and no one was willing to give him what it was worth. He was asking $70,000 because that was what he grossed each year. The highest offer he had received was $46,000 and he felt that was "way out of line." He had less than $5,000 in hard assets, no lease accounts, and no written contracts. When I explained to him that the offer he received was excellent he began to tell me how long he had had these accounts, how fairly they were priced, how great they looked, etc. He was convinced that they were worth $70,000 to someone else because they were grossing that amount for him.
The condition of your accounts matters, but regardless of how good they look, there are still ceilings on how much an informed buyer is going to be willing to pay for an owner-operated concern. A company that has no employees and such minimal hard assets is risky — too risky for most buyers. This is mainly because informed buyers know how much weight the seller's personality and track record carry over the client. Many accounts which are sold one month are cancelled as soon as three months later. And, that's the risk the buyer takes.
If you are starting a business and plan to run it as an owner-operator with no plans to expand it and then sell it, you are looking at three to four times the monthly maintenance rate plus the fair market value of the assets if you decide to sell. Other items which may be negotiable but not highly lucrative include color rotation and add-on sales. The basic rule of thumb on this issue is to be realistic about what you are doing and not set goals for the sale of your business which are founded on anything but what really happens in these kinds of transactions.
Forewarned is forearmed. Look before you leap. Knowledge is power. These are not just trite little sayings. They mean something. They do not say you that you should abandon your fondest dreams. On the contrary, they are merely good bits of advice that should be followed so that when you make decisions you will discover success and prosperity in whatever venture you pursue.
This article last updated: 04/22/2016.