Alex Tabatabai is Co-founder of Fernbank Partners (http://www.fernbankpartners.com). During this video he discusses six common financial pitfalls that can be detrimental to your business. These tips will help small business owners financially gauge their company.
- Over-leveraging & borrowing
- Misaligned management & shareholder incentives
- Speculative behavior
- Paying too high a price for assets or acquisitions
- Inadequate resource management
- Engaging in a price war
So, there are definitely some recurring themes: a couple of pitfalls from a financial stand point that we see business owners run into. I'm going to cover 6 of them briefly.
One is over leveraging and just undisciplined borrowing. I think its self explanatory but you need to be disciplined when you borrow money. You need to make the calculations and make sure there's a good margin of safety between your borrowing cost and you can meet them for the long term.
Another one is misaligned incentives between the company's management and share holder. Most businesses have a legal structure that separates the owners or share holders from the managers and executives of the business. A lot of times the small businesses -- these groups are the same people. When they're the same people the incentives are obviously aligned. If they're different people you have to very careful and review the incentives and make sure everyone is on the same page and leads a good behavior.
Another thing we see in businesses that leads to failure is speculative behavior. You'll probably see this more in the financial sector but just going after things because you think it might play out a certain way or you speculate that, you know, someone is going to pay more for some asset or some business in the future without knowing the underlining intrinsic value. Look at the intrinsic value, there is a difference between being and investor and a speculator.
Another common pitfall is over paying for assets or acquisitions. A lot of money is made or loss at the time something is acquired. The price that's paid, price discipline. When you buy assets for your business, make sure you pay a bargain price or at least a fair price. And, the same thing goes for making acquisitions about their businesses. A lot of times a business owner sees other business owners in their industry doing lots of acquisitions. Acquisitions are sexy. They got caught up in the crowd and they over pay for things and that's a big problem.
Another pitfall is mismanagement of resources of a company. These can -- resources can be a lot of things. They can be tangible assets, intangible assets in terms of intellectual property, human resources. It's very important how a company handles its executives and employees and treats them fairly and they feel motivated to do their best job.
And, to cover one last point in a lot of industries there's a raise to the bottom because of envy, a lot of other reason the company is -- in the same they lower their prices they -- too far, they hurt each other, they're competing for the same customer and sometimes it's good just to draw line and say "Hey, this is what I'm going to pay or do and I'm not going to go any further".
So, the recap there are many reoccurring pitfalls and mistakes that we see business owners make that lead to failure for the business and to recap 6 of them there's don't borrow too much. Make sure incentives are properly aligned for management share holders. Avoid speculative behavior. Don't over pay for assets or acquisitions. Don't mismanage the resources of the company and avoid in race to the bottom with competitors.