How Failure Can Be Your Biggest Success: An Entry to Exit Guide to Creating a Successful Company from Scratch

By Michael Repper

As a reader of this book. I hope that you will learn how an idea can become a company, how a company can become a burden if not structured correctly, and how a vision for a company can be a horrible thing if you don't have the skills to implement it properly or the personnel with the same passion for success as yourself. Using my personal experiences building a company, I will detail what decisions are necessary to be successful and how to financially structure your company not only to make money but to reduce risk and eliminate the unpredictability of sales cycles. I will share with you how to evaluate sales functions, secure capital, build an operations process, establish your accounting processes, utilize the power of marketing to build your company's presence, and ultimately avoid the pitfalls I made during my company's life cycle. To do this I will walk you through all the mistakes I made while building my company, detailing my biggest concerns and many sleepless nights worried about making payroll, paying interest on credit lines, and stressing over the families of the employees that left jobs to follow me in making my dream of starting a company a reality. I will be straight with you as to what mistakes really cost me money and what I did to overcome them. I am not interested in savvy business language and detailed financials. While they will be integral in helping you successfully run your business and we will discuss them as areas of opportunity, I want to give it to you straight. Businesses don't run on numbers, they run on people. They run on everyday decisions. Financials and analysis are the results of your decisions, not the path to evaluating the future. I want to take you through the pitfalls of the daily items you will deal with as a business owner, which, if not handled correctly, will cause you significant loss, loss you can't afford when you're starting a business from scratch and you have everything on the line.

• Language: English
• Publisher: BookBaby
• Release date: Apr 12, 2018
• ISBN: 9781543932294

Book preview

Them

Prologue

The history of business is long. From the start of the first public company on the New York Stock Exchange in 1792 until now, the way in which companies do business has been well documented. Substantial works have been written about the strategies of successful businesses and the growth of a corporation; this book is not one of them. My goal for this book is to explain to the reader the potential failures involved in starting a business by using my own experience, not just from the standpoint of the financial and operational view, but taking an overall approach from business concept to the eventual sale of my company for a 5-time EBIT return.

Throughout this text I will discuss my approach and the thoughts I had before, during, and after I started my company, including how my business almost went bankrupt, and how I eventually turned it around to prepare it for sale. I will discuss my mistakes in selecting partners because I was too scared to do it myself, and my errors in agreeing to contracts that limited my ability to control the company I built, and finally, how I was able to take back control, establish growth, remove one of my partners, and then structure the sale of the company to eventually allow myself the financial freedom that I set out to achieve by starting the company in the first place.

As a reader of this book. I hope that you will learn how an idea can become a company, how a company can become a burden if not structured correctly, and how a vision for a company can be a horrible thing if you don’t have the skills to implement it properly or the personnel with the same passion for success as yourself. Using my personal experiences building a company, I will detail what decisions are necessary to be successful and how to financially structure your company not only to make money but to reduce risk and eliminate the unpredictability of sales cycles. I will share with you how to evaluate sales functions, secure capital, build an operations process, establish your accounting processes, utilize the power of marketing to build your company’s presence, and ultimately avoid the pitfalls I made during my company’s life cycle. To do this I will walk you through all the mistakes I made while building my company, detailing my biggest concerns and many sleepless nights worried about making payroll, paying interest on credit lines, and stressing over the families of the employees that left jobs to follow me in making my dream of starting a company a reality. I will be straight with you as to what mistakes really cost me money and what I did to overcome them. I am not interested in savvy business language and detailed financials. While they will be integral in helping you successfully run your business and we will discuss them as areas of opportunity, I want to give it to you straight. Businesses don’t run on numbers, they run on people. They run on everyday decisions. Financials and analysis are the results of your decisions, not the path to evaluating the future. I want to take you through the pitfalls of the daily items you will deal with as a business owner, which, if not handled correctly, will cause you significant loss, loss you can’t afford when you’re starting a business from scratch and you have everything on the line.

Chapter 1

My Company Story

and Why It Matters to You

The company I started was an Energy Efficiency Company, primarily a lighting company that focused solely on light-emitting diode (LED) technology. I started a company in an industry that was in the beginning of its life cycle, on a growth trajectory, operating much like the Wild West, with each company having its own product, its own design, its own label and marketing, and none being more established than the other. See, lighting had been an established business, since Edison first created the carbon filament light bulb in 1879; however, LED technology changed the entire market. It was a game changer. As we know, a light bulb was designed for one purpose — creating light in a dark spot. It had been that way for over 200 years. Sure, there were different technologies like fluorescent or incandescent, and there are different shapes and colors of light bulbs. But a light bulb was largely inconsequential to a client, whose primary interest in purchasing a light bulb essentially came down to whether or not it would turn on. Sales staff typically sold lighting on the basis of cost and brand name, and manufacturers sold through distributors where the distributor routinely took orders for lights that failed during that specific period. They sold that client other electrical items and the light bulb was a byproduct of already having an established relationship with the client.

With the advent of LED lighting, the light bulb became more than a container for light. It became a financial tool. It was no longer a low-cost option, but now was a capital investment that required companies to get an acceptable return. The same sales staff that used to just take orders now was tasked with determining the feature benefit (which we will talk more about in the marketing section later in the book) of the product and how to take something that used to cost $1.50 and sell it for $50 a unit. Large companies couldn’t respond. They had infrastructure in place to take orders. They had staff that knew a light turned on but not how to sell the economics of the business.

This change was my business opportunity. I was a CPA, and I understood that this technology was a game changer, making lighting more of a strategic decision for companies and no longer a byproduct order placed with a distributor. It was a product that used to have a 30% margin on a $1.50-unit price that now could generate 50% on a $55 a unit price. However, you couldn’t sell it the same way, and you had to maximize the economic value and pain points of the buyer. You have to get a client to invest in these light bulbs.

That was the advantage I felt I had. I was skilled in financial analysis, and I know how to achieve a return, so I studied like crazy on lighting and designed ways to position the product differently. I focused on the savings of the product and the increase in cash flow a company could see from reduced utility costs. I looked at the increased profits a company could see with this investment versus the previous value of the light bulb, which was just the fact that the light turned on. I researched all the differences in lighting quality and color, anything I could drive as an advantage to making the change. I came up with new financing programs that I designed to reduce the upfront cost of investing in lighting upgrades. My business focused on taking something that was old and making it new. That’s one of the ways in which business owners like yourselves will look to start your companies. There are products and industries that are used every day that can be improved upon, whether that be in product development, customer service, or sales processes. Mine was a business process, so keep in mind you don’t have to have the invention that changes the world to start a large, successful company. You just have to have a vision of what the company can be and how to get there.

Like Amazon, who focused on offering books a different way, my concept was simple. LED lighting was expensive, and because it was expensive it required a different decision to be made by different people in the company, ones with more authority to commit. Because of that difference, I looked at ways to work around that constraint. We would install light-emitting diode (LED) lighting into entire buildings without an upfront payment. Instead we would calculate what they would save from the lighting and then charge them a portion of that savings for a period of time, which would allow them to pay it as an operating expense versus capitalizing it (which is frowned on when buying a degrading product such as lighting).

The concept was new at the time, but today is known as a shared savings program. By offering its payment over a longer period and allowing the client to utilize the savings it would naturally produce through reduced utility costs to make that payment, companies were enticed to purchase using the company’s capital versus the clients’ own. It was logical, simple to understand, and the company would benefit from no cash outlay, and we would only make money in the event the company reduced its utility costs over what they were previously paying. Win-win, right?

However, this wasn’t the way lighting was bought. I wasn’t a brand name, so offering something over time looked like a risk to a company versus an opportunity as I was constantly questioned about whether I would still be in business in the future (even though the client wouldn’t have to pay if I wasn’t and the only way I would go out of business is if they did not pay). I didn’t understand all these questions at the time because it was common sense that this was a win, but to my potential clients it looked too good to be true. So although I thought it was a no-brainer, clients didn’t grasp that right away. I had to change my business right out of the gate and bring clients along slowly versus changing the market right out of the gate.

I started by selling lighting conventionally through distributors, and I set up relationships with brand-name manufacturers. It wasn’t what I saw for the market or what I wanted to do, but I was too far ahead of the market, which I will talk about throughout the book. I had to break down my idea and make a plan. Throughout the start of the company, I had to make hard decisions and I made huge mistakes. I added partners to help me with capital through loans, but I structured it completely wrong, giving away equity in the process. I added overseas manufacturing and support to take advantage of lower labor to cut costs and build the product myself, which again turned out to be a good and bad decision, as maintaining that manufacturing was more expensive than the unit costs of buying the product.

However, by having the manufacturing, large companies were now willing to talk directly to me versus making me go through a distributor because if I bought from them I wasn’t competing with them and they were willing to lower their purchase prices to avoid the competition, which at the time was just a cheaper product but later became a real competitive advantage.

As the LED market grew, so did my company. I added two more cities and an office in Mexico. I had offices in five cities and was expanding. With that came new challenges, such as how to store materials, shipping costs to move product around, redundant staffing to handle local business in those cities and, at the time, moving manufacturing from overseas back to the USA as the costs of development retreated. Additionally, I had to move from growing the business by myself to identifying new people to grow the business with me and establish new territories that I wasn’t in. I had to let go of my reins and let others start to run areas of the business. It required a lot of time training and hiring to get the resources I needed to push out my business concept to new clients. I looked at radio advertising and promotional marketing as well as word-of-mouth outreach. I had to establish a strong online social media and web presence, learning SEO planning and design.

Now, I don’t want the reader to believe I did this all on my own. I hired many good people along the way. I learned from many consultants and experts in their fields to get information to help the company grow. Ultimately, though, I had to learn it myself. I couldn’t rely on others, or more specifically, I couldn’t be wholly dependent on others for any important aspect of the company. They didn’t have the same ties to the business, the risk of the liability of the banks, and in some cases the concern for its success. I am not saying employees can’t be dedicated. To the contrary, I found many staff members who were highly dedicated team members that were engaged almost to the extent I was. However, I was the leader, the head of the organization, so I had to be able to engage and discuss all topics, all functions of the business, and all aspects of its growth. How could I discuss an investment into increasing website traffic if I didn’t understand SEO or channel growth or reach? How could I make decisions on suppliers if I didn’t understand the product design, or decisions on staffing if I didn’t know the resource requirements? I am not saying you’ll be an expert in everything in your company, but you must have a working knowledge about everything that makes your company run and what drivers are important.

To acquire this information, I studied. I hired staff and then trained right alongside them, asking questions along the way. The business grew 375% in year 1, and approximately 50% in years 2 and 3. Eventually, I had some fundamental issues with my partners. Issues that would make me run the other way if I saw them today. However, at the time I started my business, I was in the middle of my career and my life. I had a wife with two young kids and I was the only breadwinner, so I needed a paycheck. My solution was just to outwork it. I stressed all the time and worked as hard as I could to overcome the spending my partners believed was necessary for growth. See, they had come from their own company. They had already made money at a separate venture, which I will talk about later in the book. Therefore, they felt they knew what they were doing, and their primary goal was to quickly get this business set up, hire people into their positions, and collect a check. That’s never how companies work and even less so in a product-driven company like LED lighting and energy projects where units sold are not a given, and we don’t have long-term contracts with clients or any real recurring business. We have to sell every day to make more than the day before.

By Year 4 there wasn’t any place to hide the spending and hiring anymore, the market was starting to get more competitive, and before they knew it they had a dip in sales by only 10% but because they were leveraging the company’s growth with debt hires we had exhausted the bank’s line of credit and were in $1m in debt. Our gross margin was 55%, and we were essentially broke. We had $400k in assets we were not utilizing correctly, 89 people on payroll, and a sales arm that cost 80% of the total labor cost and generated only 3% of our total sales for the year (the rest coming from relationships of one of the owners). I say all this so it’s clear, we were no genius entrepreneurs. We were way in over our heads. By that point, I had nothing to lose by being honest and disputing the way my partners, who were running sales, were doing things. In fact, by that time my partners expressed they wanted to close the doors, write off the loss, and move on with their other business. The only thing that made them even pay attention was the fact that they would have to pay out $1m to get even, and they were just too greedy to accept that outcome.

Now this may sound like I wasn’t a team player. Honestly, that might have been the case by the end. Here’s the background: My two partners were partners previously in a company, and I had originally approached only one of them to help develop my business. The one I wanted to work with I refer to as Mouth later in the book. Mouth was a good speaker, or at least it seemed that way to me at the time, and he seemed to be the one driving their business. I had expressed interest in having Mouth as a partner. What I didn’t realize at the time but know now is that Mouth didn’t want to work through issues. He preferred to sit in his ivory tower and make plans and design ideas, but never execute them or have to be responsible for running them long term. He wanted someone else on the hook with his investment. On top of that, he was constantly competing with his partner in his first company, whom I refer to as Lazy in the rest of the text. I couldn’t see that they had always battled for who could tell the best story. That’s what they considered to be sales. It wasn’t facts or information, it was about embellishing the plot and hoping that the tales they spun got the customer excited enough to buy.

I started out as a team player. I bought Mouth’s story hook, line, and sinker. Mouth positioned Lazy as an amazing salesperson who wasn’t cheap because he provided a lot of value. I wanted to be a good partner to Mouth, and I thought the best way was to have absolute trust and confidence in his opinion, so I agreed. I took my 100% ownership when the company was all mine and reduced it to 50% ownership when Mouth came in and then 33% when Lazy came in. I was all in, which I will explain was a huge mistake. However, instead of making one bad decision, I now ended up with two.

By August of Year 4 we had hit a wall and the bank was calling. We had a sales function that cost 40% of revenue. We had an operations staff that was creeping over 20% of revenues, and we had maintenance costs on fixed assets and interest costs on the line of credit that was outstripping our sales forecast. In addition, we were not signing jobs at the same pace that we were spending money. Most companies would have seen this. They would have had forecasts and projections to show these things. However, we had one other problem I mentioned earlier but just as the reader glanced over it, I had also glanced over it while managing the business. We had partners who battled for who could tell the best story, and both of these partners were responsible for sales! That meant we were always just about to hit the big project, the big contract, or the big sale. Our pipeline was always saying how great our prospects were. It wasn’t that they were fudging the numbers. They honestly believed it. The reality was that they were smoking their own stash, if you’re familiar with that phrase. If not, I will say it another way: They were buying their own sales pitch. And because they always believed the next deal was imminent and they believed we needed to be prepared for it, they scaled up the support and product costs and held them that way until that sale came in. Now I had forecasts that said what would happen if it didn’t come . . . which takes us back to my decision to go to 33% ownership. I now was overruled by 66% partners who did nothing but agree with each other.

By that point I realized being nice wasn’t getting me anywhere and now my family was about to suffer for my mistakes. As you will see throughout the book, I used a variety of tools to dig myself out of my failures. I am hoping that by sharing my failures you might be able to learn methods to identify potential mistakes and help your company be even stronger and on more stable foundation than mine was.

In the end, I had selected the right business plan. I had developed a good strategy and had a good product to sell. Which meant that I could still correct the many mistakes I made in operating and managing my company during its initial growth. For the reader, it’s important to make sure that your business can withstand mistakes. That you identify pitfalls and seek to avoid them, but also realize that they will happen. You will make mistakes, but if you plan for some of the mistakes I made, plan corrective action now, and avoid the pitfalls that caused my company to be more volatile than it should have been, if you do these things, then I believe you will have a strong chance at having a highly successful company. Not just a business, but an entity that will sustain the tests of time.

Who this book is written for:

Before you read this book, you should understand or have an idea of what size business you want to start. Are you a small business owner who wants to work for himself or herself, are you a full-time employee who wants a side opportunity to make money, or are you looking to start a legitimate entity, a company that can stand on its own, grow in value, and build a legacy? If you’re looking for the latter, this is the book for you. If you’re looking for how to set up a company, this is not for you. There will be helpful notes here for small business owners and sole proprietors looking to understand the obstacles they may face in starting a business, but my goal in writing this book is to help those owners who intend to build a long-term company into an asset that can grow and establish itself in its industry. Something that can live beyond any one person and that doesn’t take a particular individual to survive or thrive. I will talk about how to decide what an opportunity is and whether or not it makes sense to pursue it as a business or a hobby. We will discuss how to decide who to work with and how it impacts your business. If you want to build a company, it’s inevitable you will need to work with others and get their dedication and loyalty. You will have to offer growth and in some cases ownership to entice the right resources. We will talk about how that can be an important tool in growing your company and its reach. There are things that a company faces that a small business doesn’t. Things like handling trade secrets, training successors, and building infrastructure and intellectual property. Things like expanding to multiple locations or dealing with international expansions and how to plan and prepare for that. How to manage banking relationships and what banks will look for as your business grows.

I will discuss the mistakes I made in doing all of this. I will use my own experiences to show the reader how these items come up, why there are not easy to identify, but how they can affect your business significantly. I would say I probably made more mistakes than any successful company can hope to make and still survive. I liken it to the quarterback that throws five interceptions but still manages to win the game because he didn’t give up, he learned from each mistake, and he overcame the bad decisions that are common when starting something new.

No one can really give you a step-by-step guide to building a business. There are books out there that tell you how to register a company, or set up a TaxPayer Identification Number (TIN), or structure your company as a C corp, S corp, etc. and the advantages of each. There are books that can tell you the mechanics of the setup, but because your business is unique, your concept will be personal, your existing experience and tools are individual, and your management style will be your own, it is impossible to say, This is how all companies should start. Therefore, this book will talk about the obstacles I encountered when structuring my business, the mistakes I made, and the items that I could have corrected had I known to look out for them. I will look across industries and business types to talk about items that affect all businesses, such as cash flow planning, staffing, expansion and common operational and supply chain items that affect all businesses but can be managed for success if understood and planned for. I am not going to talk about day-to-day activities. These are unique to every business. How you order products or provide your services will be different given the industry and the environment you’re in. However, all business will have to manage suppliers and inventory, so we will discuss how to overcome challenges in those areas.

If you’re interested in knowing how to grow an idea into a company and a company into a stand-alone entity, this book will help you get there, avoid pitfalls, and plan for growth. Some items may seem like common sense to you, but one thing I learned in my experience is that sense is not very common when you’re stressed about feeding your family, supporting your clients, growing sales, and taking care of your staff. Know what you’re getting into and how it can affect your ability to grow. Also know that you’re not alone and all business owners have to overcome these challenges when they start out but hopefully figure out how to get the business moving in the right direction sooner rather than later.

The very first thing you need to do is decide whether your idea, concept, or design is ready or developed enough to be a company. If it is, how do you start putting that concept into a plan that others can get behind? So let’s start there.

Chapter 2

Deciding What Business

You Want to Pursue

As I mentioned in the prologue, wanting to be successful at business and doing so are very far apart on the decision tree. I myself made some crucial errors that I will share with you throughout this book. I call them mistakes, but not because I wouldn’t have done them again. Instead, if I had handled them properly, they could have set me on an entirely different course, one much preferable to failing as many times as I did. See, success is a combination of fortitude and chance leading to things falling in your favor. I think Oprah said it best: Success is when preparation meets opportunity. However, getting those