To survive your first year, beware
of businesses that prey on greenhorns
By Jay MacDonald • Bankrate.com

Jay and Susan Weiss can laugh about it now -- they survived being new business greenhorns.

The baby boomer couple considered themselves an entrepreneurial dream team in 1996 when they launched Gulf Coast Nutritionals, a Florida-based manufacturer of natural health care products for pets. Jay, who had spent half his life as a clothing manufacturer, had the back office experience in buying raw materials, manufacturing, distribution, bookkeeping and inventory control. Susan, a former teacher, had the marketing and sales background to make the front end sing.

Sure, they were a tough, shrewd team. The problem was, their new business was in an industry new and foreign to them.

They got taken. Big-time.

"I'd made a giant screw-up"
"I made a very expensive mistake by hiring someone who supposedly had a lot of background in the industry, and because I didn't, I couldn't ask him really in-depth questions where I could have known immediately that he didn't know what he said he knew," says Susan. "He was very expensive and we paid a relocation fee. I realized in 48 hours that I'd made a giant screw-up."

The bad hire was gone within six months, leaving Susan to learn the business under the gun. She didn't immediately understand the intricate distribution channels or the interrelationship between national distributors and independent brokers. As a result, she signed up her first distributor in Texas and her first broker half a continent away in New York.

"Nobody is going to hold your hand," she says. "Nobody is going to coach you. They assumed I was a grownup like everybody else. They didn't say to me, 'Now, do you know what you're doing?' "

Jay was wrestling with a learning curve of his own. Within the first six months, the Weiss' suffered a $75,000 bad debt that, compounded with lost sales, ended up costing them $120,000. Despite winning a three-year court battle, Jay doubts they'll ever collect a cent.

Equally costly, he says, was their insistence on financing the business themselves.

"A big mistake that we made is we thought we had plenty of money to make it. Big mistake, big mistake," says Jay. "What happens is, you put in your hundreds of thousands of dollars and you're not getting a return. Now you need a bank. Well, guess what? It's too late, because your assets are tied up in the business. The bank says you don't have enough assets to secure the loan because you're not a brick-and-mortar business."

Surviving the "welcoming committee"
The Weiss' experience is not unusual, according to Tom Culley, author of Beating the Odds in Small Business. Because many entrepreneurs have logged years as executives or employees in convivial office settings, they tend to believe the rosy "we're-here-to-help-you" siren song of what he calls the "welcoming committee" -- businesses that prey on neophytes.

"Because it's lonely in small business, you have a tremendous tendency to believe what you hear, and of course that's not the case at all," says Culley. "Everyone in business is out for themselves, which is not to say that's a bad thing. That's what business is."

Culley likens the newcomer's learning curve to mastering the knack of tossing away junk mail.

"You are immediately deluged with offers and they're very well targeted. If you have a business in home decoration, immediately you are inundated with offers from people who know the home decoration business far better than you. Until you've gone through that learning curve in order to know you don't need to buy that software, those supplies, those stocks, you really aren't able to make the right judgments."

Watch out for professional advice
Culley says a common mistake neophytes make is to blindly trust their lawyer.

"Lawyers know that most small businesses fail, so they try to get their money upfront by selling services that are unnecessary," he says. "They sell you the need to do certain things for the future -- incorporating, shareholder agreements, wills. It's quite easy for people to run up $3,000 to $6,000 in legal fees and it's all unnecessary because the only thing that matters is surviving the first or second year. While lawyers might be decent professionals, they're trying to sell you luxuries. You can't afford luxuries; all you can afford are essentials."

The risks of being taken have only increased with the advent of the Internet, says Culley. "They've read the Internet success stories and say it's OK to spend money when you're just starting out, all the people who get rich do it. Ignoring what's staring them in the face, which is that it's a stock market play. Take the stock market out of everything you read about the Internet and 99.9 percent of these businesses make no sense whatsoever."

Instead, the prudent new business owner should question everything, especially advertising hype.

"Be cautious, be careful, and sometimes, be slow. The messages you're getting are always the reverse -- go fast, hurry, become a success in three months or six months. It doesn't happen that way. You have to recognize that you are the target of considerable advertising and media hype."

Knowing where to turn
Whom can you trust?

"Curiously enough, the one ally most people can trust is their accountant," he says. "Accountants are small businesspeople by definition. They're local. They depend on the local community to survive. Accountants know that they can't overcharge for their monthly services because it's too apparent what they do. They're far more likely to be critical; the goods ones will look at your numbers and say, 'Hey, what's going on here?' They are more likely to give you some guidance because they've seen it before."

The Small Business Administration and local Service Corps of Retired Executives office are invaluable free resources that will help you find the best professionals and businesses in your area.

Susan Weiss is philosophical about her trial by fire. "Even though we had the generic skills, the most difficult part for us was we didn't have a history in this industry, and in essence had to learn on our own dollar. It's certainly better to learn it as an employee for somebody else."

Culley says a healthy dose of skepticism is the best trait to take into a new business venture.

"It's not that you're becoming a small-business person; you're becoming an independent businessperson. You're independent of a boss, of a job; you're striving for only one thing, financial independence. All that matters is your survival in a jungle. You need to be 10 times more suspicious than you were as a consumer, 10 times more skeptical than you were as an employee. You have to keep repeating to yourself: 'I'm on my own, I'm on my own, I'm on my own. And I'm vulnerable.' "

Jay MacDonald is a contributing editor based in Florida
To comment on this story, please e-mail the Bankrate.com editors

-- Posted: March 30, 2000