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STREET SMARTS

Don't Sign Anything Yet

Beware of commitments that can doom your business from the outset.

Norm Brodsky is a veteran entrepreneur.

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Starting a business is an emotional experience, especially if you've never done it before. Most people feel an odd mix of overoptimism and anxiety, impatience and fear. With all those emotions swirling, it's easy to fixate on the wrong things and to make mistakes that can come back to haunt you.

There are, I believe, two principal dangers. The first is that you'll try to bolster your confidence by spending money on stuff you really don't need, like fancy stationery, brand-new office furniture, or an expensive location. Or, you may be in such a hurry that you make commitments without insisting on safeguards or thinking through the consequences. Either way, you risk wasting your start-up capital and running out of cash before your company becomes viable. Then, likely as not, you'll say that you failed because your company was undercapitalized, which is like saying you'll die when you stop breathing. Technically it's true, but it tells you nothing about the real cause of death. In my experience, new companies usually fail not because they don't have enough start-up capital but rather because they aren't careful enough with the capital they do have.

Let me tell you about some people I've been advising who almost made that mistake. One is Irina Fatakhova, a Russian manicurist who worked in a nail salon near our business in Brooklyn. My wife, Elaine, swore by her. Unfortunately, the shop's owner did not treat her employees with the respect they felt they deserved. A few months ago, Irina told Elaine she'd had it. She knew nothing about running a business, but she'd decided to open her own place. Elaine said, "Don't do anything until you speak to my husband."

It's not true that new companies fail most often because they lack capital.

Later that week, Irina and her husband, Slava, came to see me and brought along a contract they were getting ready to sign. They said they'd already chosen a spot for the shop. It would share space with a clothing store whose owner wanted Irina and Slava to sign a sublease. They asked me to look it over.

I saw that they would be paying their rent to the current tenant rather than the landlord. "What if she doesn't pay her rent?" I asked. "She could go out of business, and you could lose your entire investment overnight."

"Okay, but we really want this space," Slava said. "We've been looking for months. It's the perfect spot."

That feeling is typical whether you're starting a hair salon, a software company, or a records storage business. You want to get the location issue out of the way as quickly as possible so that you can move on to the next thing. If you've spent a lot of time searching for the right location, you're in an even bigger hurry. You push aside matters that may not pose an immediate problem but that could spell trouble later on.

I told Irina and Slava that they should at least meet with the landlord before agreeing to a deal with the tenant. While they arranged the meeting, I did a little research, going several times to look at the space. I could see why they wanted it. The building was newly renovated and in a good location. The clothing shop, however, was obviously struggling. The owner was never there when I went by, and the store wasn't always open when it was supposed to be. In addition, it appeared to be running low on inventory -- all classic signs of a failing business.

Slava and Irina reported that the landlord, a woman, didn't mind if they subleased the space. They also said that she didn't seem to have a high opinion of the tenant's business acumen, which made me even more nervous. I suggested that they request a separate lease, which they did, but the landlord didn't want to receive two rent checks each month. She promised, however, to work something out with them if the tenant defaulted.

That was better than nothing, but I warned Slava and Irina that they'd have to be vigilant. I told them they should call every month to make sure the landlord had been paid. If she hadn't, they should inform the tenant that they would withhold the next month's payment until the landlord got a rent check. They couldn't let two months go by when they paid and the tenant didn't -- or there was a good chance they'd never get their money back.

Meanwhile, another business drama was unfolding elsewhere in Brooklyn. During a haircutting appointment, my wife's hairdresser, Joy Polintan, said that she'd heard I worked with people going into business and asked if I'd be willing to advise her. We set up a meeting, and Joy came to see me. It turned out that she, too, felt mistreated by her boss and had decided to open her own salon. She'd spent four or five months searching for space before settling on a storefront. Joy said that the space was a little small, but she was inclined to sign the lease anyway. She asked me to review it.

Not only was it small -- it was a dump, as I pointed out the next time we met. "Yes, it's awful," she said, "but I should have enough money to fix it up."

"What if you get more business than you can handle in that space?" I asked.

"I'll move," she said.

"You may not be able to," I said. "You can't take building improvements with you. Are you sure you want to spend all your money renovating a place you may have to leave in a short time?"

She hadn't thought about that, which is also typical. In their haste to get started, people tend to make a series of little compromises, one at a time, without noticing how they add up. Imagine if I'd come to Joy and told her I'd found space for her beauty parlor, but the place was a dump, she'd have to spend all her money renovating it, and it was too small, so she'd have to move in a few months. She'd have probably given me a strange look and walked away. But here she'd convinced herself, step by step, that the space would do.

Occasionally, there are solutions that first-time entrepreneurs don't consider. If a space has been on the market for a while, as this one had, you may have leverage. Perhaps you can convince the landlord to do a build-out -- that is, make the improvements you want with the understanding that you'll cover the cost over time by paying a higher rent. Or maybe you can get the rent waived for a few months.

Joy didn't want to negotiate with the landlord, however, so I told her I thought she should keep looking. She had a job, after all. Why couldn't she take another six months to find the right space? At the same time, she'd be adding to her savings, giving herself a larger cushion when she finally got started. But Joy didn't want to wait. She said she'd already checked out the available space in her target area. I pointed out that new space was constantly coming on the market. And because all of her business comes from referrals, I suggested she might think about expanding the target area by a few blocks. "I have to do this now," she insisted.

"Why?"

"Because I hate where I am," she said.

Such feelings are not all bad. It's good to have a sense of urgency. But you can't let your impatience cloud your judgment or force you into hasty and potentially fatal decisions. For some reason, those decisions often have to do with finding a place to set up shop. Frankly, the best protection is to do exactly what Irina and Joy did: Get advice from a businessperson who has lived through these kinds of mistakes.

As you may have guessed by now, this story has a happy ending. The clothing shop went out of business, whereupon the landlord asked Irina and Slava if they wanted to take over the lease. They said yes, but they had to find someone to share the rent with them. Enter Joy. The space was just right for her in terms of size and location, and the erstwhile clothing shop could be turned into a hair salon with minimal work.

So now there's a new beauty parlor alongside a new nail salon in Brooklyn, and they feed off each other's business. And without realizing it, two owners who didn't take care of their employees have created their own competitors.

Norm Brodsky is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.

Last updated: Jan 1, 2005

NORM BRODSKY | Columnist

Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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