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The 5 biggest mistakes entrepreneurs make: The Profit

By Zoe Henry, special to CNBC.com
Lemonis: What entrepreneurs need to know

"As the business has grown, so have the problems."

That's how Marcus Lemonis, host of the CNBC show "The Profit," explained the plight of the floundering Greek food business My Big Fat Greek Gyro, which he attempted to save in a recent episode of the show. Lemonis encounters this theme all too frequently with the businesses featured in the reality series, and he uses his money and experience to help.

Lemonis, the chairman and CEO of the billion-dollar recreational vehicle supplier Camping World, is not always able to turn around the companies he invests in, however. The Profit highlights a host of entrepreneur mistakes, from balking on promises to failing to communicate with employees to delegating too many important tasks to a third party. Here are some of the critical errors that have occurred on the show.

1. Failing to communicate across the company

Like many entrepreneurs, husband and wife Mike Ference and Kathleen Kamouyero-Ference of My Big Fat Greek Gyro may not have been fully prepared to handle scaling their business. At the time that Lemonis stepped in, the company was making $100,000 in annual profit. Lemonis saw potential and offered to invest $350,000 in return for a 55 percent stake and full creative control. (To Kathleen's chagrin, he ultimately renamed the company The Simple Greek.)

The owners had made the decision to franchise, which Lemonis explained can be an attractive move: You avoid the costs and potential liability you'd incur with chain stores, and each franchisee must pay a royalty. However, it's important for any company to keep the channels of communication open, especially as it grows. Mike and Kathleen were meeting with their franchisees only once or twice a month. As a result, the franchisees had little sense of direction and thus brought in only a fraction of the business's potential revenue.

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By the end of the episode, however, Lemonis said that Mike had built a "strong rapport" with franchisees: They all came together to help The Simple Greek reopen its newly renovated Mt. Lebanon, Pennsylvania, location. Lemonis also helped them to set up a new Wi-Fi network and mobile payments system, allowing the franchisees to clock inventory from any location at any time. Over the next six to eight months, he said, The Simple Greek will renovate its other three locations in Pittsburgh; McMurray, Pennsylvania; and Highland Park, Illinois.

2. Breaking your investors' trust

It may sound obvious, but if you make a promise to an investor, you should keep it. Not everyone on "The Profit" does.

In the recent episode "A Progress Report," Lemonis revisits Jacob Maarse Florist, a business from the second episode of the series, in which he had invested $100,000 for 25 percent of the profit. He also explained to viewers the reason he closes every deal with a handshake: It's more genuine, thus making partners more likely to keep their word.

Still, owner Hank Maarse refused to give Lemonis his share of the company, even after Lemonis had spent more than the agreed funding to help turn the florist around. In response, Lemonis called Maarse "a thief, a liar and a cheater." Two weeks after the episode aired, Maarse's mother sent Lemonis a full refund.

3. Micromanaging employees

The health of a business can often depend on the happiness of its staff, as the Profit has proved time and time again. One of the biggest mistakes that entrepreneurs on the show make is micromanaging their employees. This was the case at the Key West Key Lime Pie Company in a 2014 episode. The Florida pie maker, headed by Jim Brush and his girlfriend, Alison Sloat, generated more than $1.4 million in annual sales but had yet to see a profit. The company had stretched its resources too thin. It also sold non-branded products that took up far too much store space, while accounting for just 20 percent of annual revenue with what Lemonis described as "terrible" margins.

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Brush had a fiery temper and was quick to blame employees for his mistakes. While the company had plenty of other problems—its failure to create sufficient revenue through its retail products, for one—Brush's reluctance to listen to and respect his workers was one of the biggest. In the end, the Key West Key Lime Pie Company was able to reinvent itself by focusing on its signature pies (using natural ingredients rather than a powder filling) and getting rid of other items in its store. Ultimately, Lemonis said that Jim became a "totally different person."

4. Arrogance

Confidence is necessary for success, but knowing when to be humble is another of the Profit's big takeaways. Many business owners have treated Lemonis with contempt, but perhaps none so blatantly as Skullduggery owners Steve and Peter Koehl.

Skullduggery, a California-based toymaker that produces racing toys, fossil replicas and craft kits, had $1.6 million in sales, yet it couldn't turn a profit. Lemonis stepped in with a $1.1 million deal for 30 percent of the company and an ongoing sales royalty and even managed to get Skullduggery a meeting with the chief marketing officer of NASCAR for a potential licensing deal. But the Koehls believed that they were too good for NASCAR. In the meeting, Steve asked, "Why do you think NASCAR's good for Skullduggery?"

This move drew Lemonis' wrath: "Hearing the stuff coming out of Steve's mouth is shocking," he said. "I'm mortified." Lemonis walked away from the deal, losing the money that he'd already invested.

5. Delegating all the details

Naturally, many entrepreneurs need to delegate some of the day-to-day operations of their business to others. And in the early days, it can also be tempting to source products from third-party vendors. The Simple Greek owners, for example, ordered frozen grape leaves and French fries instead of making their own products fresh.

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As the Profit has continually demonstrated, though, a laissez-faire strategy is not the way to grow a successful business. Lemonis explained that using fresh potatoes wouldn't just make for more wholesome food; it would also save the company nearly $25,000 per year. As every scrappy start-up founder knows, every little bit saved counts.

The Simple Greek owners took Lemonis' advice: They improved communication between their four locations, made food quality their priority and honed their marketing plan to reflect a more authentically Greek brand.

"I believe in the product and in the process. But mostly I believe in the people," a satisfied Lemonis said after the company's transformation.

—By Zoe Henry, special to CNBC.com

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