Solo Contendere: Why small businesses come up short

 Michael Kemp, The Daily Record Newswire

It is with a heavy heart that I have to announce that I am no longer in the running for Warren Buffett’s $1 billion March Madness bracket challenge. I’m not going to become a billionaire — at least, not this week.

In fact, my bracket was busted almost as soon as the NCAA basketball tournament had begun, when No. 2 Wisconsin shocked absolutely no one by beating a completely outmatched No. 15 American University team on the first (real) day of the tournament. Why would I pick this ridiculous upset, you ask? Statistics. Or at least, a lawyer’s understanding of statistics.

This year’s bracket has shown the statistical improbability of anyone winning the challenge: every one of the millions of eligible brackets was eliminated by the Sweet Sixteen. For someone to win, the odds favored a dramatic, almost shocking upset. Good science? Probably not. But wouldn’t it have been a good story?

I’ve used this statistic before, and I’m going to keep using it: Three out of five small businesses fail. To beat the odds in opening your own firm (notice how smooth that segue was?) you might think you need to do something dramatic; something to stand out from the crowd. Your own version of a 2–15 upset. But while standing out from the crowd is not necessarily a bad thing, the top three reasons small businesses fail have little to do with making a splash; to succeed in business, as in basketball, the answer is usually a good game plan, hard work, and good coaching.

For those keeping score, the list of top reasons small businesses fail comes from a New York Times Small Business article from successful Chicago entrepreneur Jay Goltz.

The math doesn’t work

The first and one of the more important reasons that small businesses fail is that the math just doesn’t work: There is either not enough demand or not enough demand at a reasonable price point to sustain the business.

One of the most frequent questions new lawyers looking to open their own shop ask is “How do I find clients?” The easiest answer, as anyone who has been in business a few years will tell them, is that this is the wrong question. The better question is how to find clients who can pay. The answer to that question could be (and probably will be at some point) the topic of a column in and of itself. As soon as I figure it out I will let you know.

The demand is there; the question is merely whether the demand is there at a price point that will support a solo or small firm. Are you able to attract enough clients in your practice areas to sustain the business? Most solo attorneys before they go into practice will have done at least some scouting; find out what areas of practice are growing, saturated or shrinking. They will find out how much the competition charges. They will go into the practice with a rough idea of the math involved, and hopefully have a good idea of whether the demand for business in the area and at a particular price can sustain another firm. If not, they’re setting themselves up for failure.

Owners can’t get out of their own way

Mr. Goltz’s second reason small businesses fail is that owners may simply not be cut out for opening a small business. They may be too stubborn or not stubborn enough; averse to taking risks, perfectionists (he lists it as a flaw, right next to “greedy”), or try too hard to be liked. As the parable goes, it’s easier to tell these flaws in others than in ourselves, but Mr. Goltz lists owner’s problems as a major factor in the failure of small businesses.

For small firm attorneys, presumably this suggests one important thing: have an outside perspective. Even if you don’t go into business with a partner, have a mentor. We need someone we trust who can tell us honestly when we’re taking our business off the rails: When we’re trying to do too much, or not enough. When we’re taking a stupid risk, living on false hope, or when it’s simply time to cut your losses and pop smoke. Everyone has at least one person, maybe more, who can see and honestly tell us our flaws (mine have a support group and a website). Mr. Goltz’s research and experience tell us that we as small business owners ignore those people at our own peril: they may see, before we do, the flaws that our spreadsheets and business plans have overlooked.

Out-of-control growth

The third reason many small businesses fail is that they grow too fast. That sounds counter-intuitive, but Mr. Goltz makes a good point: Businesses that move into unprofitable markets or attempt to take on too much are as likely to fail as those which take on too little. I’ve seen it; I know many others have as well. Behind closed doors and over a pint we share the horror stories: solo attorneys who try to represent too many people at once. At best, they are simply unavailable to their clients, and so even if they get good results their clients end up less satisfied because they can never get their lawyer on the phone, or the lawyer takes their money and then delegates all the work to younger associates and the client never sees the lawyer again. At worst, it may result in poor work, missed deadlines, and compromising the client’s case because the attorney has simply taken on more work than he or she can reasonably handle. Growing too quickly, Mr. Goltz says, can be as bad as growing too slowly. Most people in small firm practice have seen this borne out.

There are quite a few other reasons small businesses fail: poor accounting, inability to survive the lean times (lack of an operating reserve), failing to streamline operational expenses to keep overhead, low, etc. Honorable mention to them all. Most of them are common sense: it’s not that we don’t know them, it’s that we don’t practice them. Jay Goltz is trying to tell small businesses to focus on the fundamentals. 

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Contact Michael Kemp at mkemp@metlawmn.com.

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