To be successful, it is helpful for you to understand the reasons why others were not. The bad news is that the overall statistics of small business failures are very high. It is estimated that there is a 80% failure rate over a five-year period from business commencement. The good news, if you are operating from home, is that the failure rate is lower than a business outside the home. This is because the initial and ongoing risk is usually lower. In addition, there are home-related expenses you can deduct from your business income, thereby increasing the net profit.

The reasons for business failure are many. The entrepreuneur’s personal limitations are the primary reason. This includes, in order or priority, lack of personal qualifications to run a business, lack of experience in the line of business, lack of training, and unbalanced experience. These limitations lead to the following more specific reasons.

1. Money mismanagement
Money mismanagement is a common reason for business failure. Some of the typical problems home businesses encounter include: insufficient funds to meet startup and operating expense needs, cash flow problems, too much debt, not enough money to grow, charging insufficient to make a profit, inadequate financial planning, poor credit and collection practices, and inadequate bookkeeping. Many entrepreneurs “bleed” the business by taking more money from the business that it can afford. It is important to save some of the earnings a buffer for unexpected business expenses or to reinvest the business.

2. Poor marketing
Many entrepreneurs simply don’t know who their prospective customers are. They have not done their marketing research – have not identified their market, segmented it, or actively promoted it on an ongoing basis. You may have a great product or service, but if the message does not get out, the business will suffer accordingly. Preparing and following a realistic and attainable written marketing plan is necessary.

3. Mistaking a business for a hobby
Many people enjoy what they are doing, but never consider it more than a hobby. The object of operating a business, of course, is to earn a salary, recover all your expenses and make a profit.

4. Failure to evaluate themselves realistically
The failure to make a frank assessment of personal strengths and weaknesses, needs and desires is a common mistake. You may find that your business requires skills that you do not possess, such as a goal setting, decision-making, and selling. Objective feedback from your family, friends, relatives, and business associates is necessary.

5. Failure to set and revise goals
Goals or objectives are not determined, or they are ineffective because they are not measurable, specific, or realistic. Preparing a business plan is an essential part of goal setting. Failure to reassess goals can create serious problems. Various direct and indirect factors can affect your goals and require them to be modified in order to remain viable and effective. For example, unexpected problems could occur such as the illness of the owner, new competition, overly ambitious timetables, supplier delays, increase in lending rates, or loss of a major client. Revising goals will ensure your business continues to grow despite unexpected obstacles. Reviewing the targets you have met can provide an important sense of accomplishment, self-confidence, and motivation to continue.

6. Not being suited for a home-based business
A person could otherwise have good business potential but cannot adjust to the unique features of operating a business out of the home, such as self-discipline to establish a regular work routine, or ability to separate family life and work.

7. Lack of commitment
Personal motivation and desire to stick with the objective, regardless of the normal ups and downs, is essential. Some people give up their commitment too easily if the goal is not attained quickly and without difficulty.

Reflect on the reasons for failure just described above and set out to do the opposite. Do a detailed personal assessment, be honest with yourself, and ask others who know you well for their candid input on how suited you are for the business you are considering. Seek and obtain quality input from your professional advisors and from those people who matter most.

There may come a point in your business life cycle when you may be tempted to consider a partnership relationship. Some may think this is a panacea and will ensure the success of the business. This may be so. On the other hand, it is more often a naive myth than a pragmatic reality.

You should honestly ask yourself why you are considering a partnership and if you think a partnership would work out. Some people go into a partnership relationship because the other partner(s) have money, contacts, expertise or skills which complement your contribution. You might want to consider other business alternatives that might meet your goals. For example, having a joint venture or strategic alliance or consulting or independent contractor relationship on an “as-needed” or project basis. These options can be structured to give you individual autonomy, independence, flexibility and control. In effect each party would still retain their separate business structure, in legal and tax terms.

The reason you want to be cautious, is that the casualty rate of business partnerships is very high. There can be many factors causing a falling-out. It is not uncommon in terms of human dynamics to have potential conflicts occur due to differences of priorities, personalities, or philosophies over a period of time. In addition, there could be differing expectations by each of the individuals in terms of the contribution of time, money, and talent. Other factors that tend to cause friction include the issues of ego, money, and power. These three areas are frequently the undoing of business relationships.

Business conflict usually results when extremes occur. For example, when the business is doing very well or very poorly. Another factor is burnout or life-style changes. Many people get tired after a while of the time, energy, and commitment involved in a business operation and want to do something else – go into another business or otherwise free up money that is invested in their business. There can be marital or health problems that cause a person to lose interest in the business or create conflict within the business.

For these reasons and the serious implications that would result, you should have a partnership/shareholders agreement to protect your interests. The agreement sets out formulas for resolving potential disputes and other issues. For example, division of duties and responsibilities; life insurance on partners; powers of directors; selling the business; share sales and transfers; shareholder investment, loans or guarantees; signing authorities and borrowing powers of the company.

One of the key provisions in a shareholders agreement is a buy/sell clause. You may want to buy out your partners or vice-versa in certain situations, such as disagreements, death, disability, bankruptcy, termination of employment or default of terms of the agreement. The agreement should be prepared prior to the incorporation of the business, or in the case of a partnership, prior to commencing business.

Draft your own version of the key factors that you would like included in an agreement, after discussion with your potential partners. Then take your draft agreement to the lawyer being retained for the business, to be reviewed and finalized. Make sure you have your own independent legal advice. Every partner should do this, as the corporate lawyer cannot also advise the individual partners. This would be a conflict of interest. The legal costs involved will depend on the degree of complexity of the agreement, the number of shareholders or partners involved, the number of meetings that might be held going over and explaining the various terms of the agreement, and other factors. At an estimated charge-out rate of $150 per hour you should expect to have an average time range of from 5-10 hours ($750 – $1,500) for a basic shareholders agreement.