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Starting a business? Don't get caught by these surprises

Deborah Nason, special to CNBC.com

Thinking of starting a business? The potential rewards are many, but so are the potential land mines.

CNBC.com spoke with several seasoned entrepreneurs about what caught them by surprise and what lessons they learned along the way.

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Dig a deep well. "What shocked us was how deep your well must be before you make that leap," said Patrick Morin, managing director of Transact Capital Securities, a boutique investment bank. He was part of a team of serial entrepreneurs for eight years before joining the bank.

"If you're an entrepreneur, you are naturally optimistic," he said. "You'll think things will go faster than they do.

"In your heart you believed your money would last," Morin added. "That's the No. 1 thing — whatever you think will sustain you in start-up mode, make it bigger. If you have a year's worth of funds, make it 18 months to two years."

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Hold on to the zealots. Talking about a happy surprise, Morin said that "when you find zealots to join you, never let them go, whether you're talking about partners or employees."

"Going into our second start-up, we put together a team of six people that worked for 10 months without salary," he said. "There's a certain joie de vivre that an entrepreneur vocalizes that makes everyone want to be a part of the effort.

"The stress of a start-up is so high, you need to treat them right," Morin added. "It's not just about the money — loyalty is paramount."

Be prepared to let go. "What most people don't get their heads around is that markets shift so fast," Morin said. "One of our start-ups got disrupted before we even got out of the gate, because a technology came on the market that beat ours.

Whether it was bringing on a new employee, putting a website together, setting up an accounting system or qualifying clients, I learned that systems have to evolve over time.
Tom Franke
president of Roundhouse Recruiting

"We learned to pay attention to the broader market at all times," he added. "You can't be so committed to one idea or one path."

Don't count on a partner. Ray Morreale, CEO of South Florida Concrete and Masonry, said his biggest surprise was when his partner left, forcing Morreale to scramble to buy him out.

"My advice is, don't have a partner," he said. "Make sure there are attorneys involved, because partnerships rarely work out."

It's imperative to set up a buy/sell agreement to delineate who's responsible if someone wants out — otherwise, you can be stuck figuring out how to get out of it, Morreale said. "Thank goodness it happened early on in the business," he said. "If it had happened later, it would have cost me a fortune."

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Watch for theft. Morreale had another surprise that took him years to discover: Employees were stealing from him — tens of thousands of dollars over time. "What I learned is, don't trust people, no matter how long they've been with you," he said. "You have to always protect yourself against theft."

Understand diversity. Andy Kalfas has owned several businesses over the past 30 years. One of his businesses had a largely Hispanic workforce, which provided a major lesson in managing diversity.

"My surprise was that I had to become a referee in navigating cultural differences to keep everyone happy," he said. "I didn't realize the pecking order among the Hispanic community.

"I learned to recognize who's from where and how they like to be treated," Kalfas added. "I had to become an expert in diversity."

Systems take time. Tom Franke, president of Roundhouse Recruiting, founded his business eight years ago. He was surprised at how long it took to set things up.

"Even though I'm very efficient and careful, it seemed it took two or three times to get any initiative right," he said. "Whether it was bringing on a new employee, putting a website together, setting up an accounting system or qualifying clients, I learned that systems have to evolve over time."

Not all clients are equal. Another surprise to Franke was the need to focus on quality clients, not more clients.

"When you're starting up, you think the first thing is to get more clients, but the easiest ones weren't necessarily the best quality ones; they weren't worth our time," he said. "I learned how to charge accordingly."

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Accounting is more important than clients. "When I first started, I got two large clients and ramped up from just me to employing 18 contractors," Franke said. He focused exclusively on growing the company, and soon things felt out of control.

"Even though a lot of money was coming in, just as much was going out," he said. "You're thinking, 'Take care of the clients. I'll put these payables in the stack and I'll get to them.'

"But without the accounting system in place to manage cash flow and P&L, you will spend as much as you make," Franke added. "Once you understand your numbers, then you have clarity on making the right spending decisions."

— By Deborah Nason, special to CNBC.com