Marcus Lemonis on What It Takes for Small Business Success
Education and Careers In a recent survey, one-third of small business owners claimed they couldn't get needed funding. If you’re one of them, "The Profit" star has some advice.
As the finance guru on CNBC's "The Profit" and the upcoming show "The Partner," Marcus Lemonis has watched many small businesses succeed while others crashed and burned.
Fit to run a business?
Even though a U.S. Bank study says 82 percent of failed small businesses put the blame on cash flow problems, Lemonis thinks the primary obstacle facing small businesses is much more basic. "I think the number one problem is that you have two different sectors in small business — there are those who understand the importance of numbers and having a good product, and then there are people who decided to get into business because they thought it was cool and hip, and they forgot they needed to bring money to the table and have a business plan."
Lemonis thinks the focus on cash flow is a distraction from a larger, thornier issue. "To say that money is the biggest problem gives credence to the idea that everybody's actually qualified for business,” he explains. “The number one problem is you have people applying for loans who really aren't qualified. It casts this shadow over other small businesses that have their act together and who are having no problem raising money.
“You have a number of people calling themselves small business owners who have opened up a small business bank account but don't even have money or a good business plan,” Lemonis adds. “It's troubling for me. I've invested $30 million of my own money in small business, and I'm finding with these businesses that money isn't the only problem. That's just the easy answer."
What makes a promising business
For Lemonis, assessing whether a small business is worthy of an investment of his money and his time, he looks at several factors. "I have to be comfortable with the people I'm investing in,” he admits. “You have to believe in their work ethic. I don't want to be doing business with people who like selling widgets but have no idea how to use them.
“Then, when you look at the financial statements, it isn't the strength of the financial statements; it’s the accuracy and the transparency. It's understandable that people need money. And I don't expect them to be making a million dollars a year, but I expect their books to be accurate."
He also looks for the right attitude: "I want to see humility. I want to see that they understand what they're good at and what they're not good at and acknowledge what their weaknesses are. I need to know they will ask for help. When they act as if they know it all and have all the answers, and when they lack the humility required to be a good learner, I'm not interested."
Improving your success rate
Lemonis has one suggestion as to how small business owners might have a better success rate, since currently only one-third survive more than 10 years. “To get a driver's license, you have to pass the driving test. To get into college, you have to take the SAT. To get a small business loan, what test are you taking?” probes Lemonis.
“There are no tests. It's the most ludicrous thing. We make people take tests to be a doctor or a lawyer, but we don't make them take tests to borrow money? We're not putting any resources behind teaching people and giving them an education around the process."
He does have a suggestion as to how new entrepreneurs can learn, however, and it doesn't cost a thing. "I recommend they work for somebody else until they learn,” says Lemonis. “People don't have a right to open up a business and say, ‘Hey, I'm great salesman but I don't know how to run my numbers or read my financial statement.’ You don't get a hall pass because you're a good salesman. Running a business is a serious thing. You've got to have your act together."
When it comes to getting capital? "I don't recommend the friends-and-family route,” he adds, “because it puts a lot of strain on those relationships. Another way is to put some personal assets at risk to show a true commitment to the lender. If you want a non-traditional lender, you have to have equity and pay a higher interest rate. With the traditional lender, you have to be willing to put everything you have on the table. If you're not willing to pledge your assets, that gives me a lack of confidence."
If you work hard, have the right attitude and still don't succeed? Don't give up. "I've made mistakes plenty of times in my life and there are people who have given me second chances," Lemonis sums. "Every entrepreneur deserves to be given a chance."